Inheritance Tax Planning

Inheritance tax and the Nil Rate Band

Each of us has a personal allowance for income tax and capital gains tax but we also have a specific allowance for inheritance tax (IHT), and this is called the Nil Rate Band (NRB). The current NRB is £325,000, which means that if the total value of your estate on your death amounts to £325,000 or less there will be no tax liability.

Even if you believe your estate is below the £325,000 IHT threshold and will not be subject to IHT on your death you should still consider making a Will and taking estate planning advice to avoid the negative consequences of an intestacy.

Are there any exemptions from IHT?

Yes, even if your estate is over the £325,000 threshold, there are a number of situations where IHT will not be payable as the estate is deemed IHT exempt. There is no IHT payable on assets which pass to a spouse (which includes a spouse from a same sex marriage) or civil partners in a registered civil partnership, for example.

What is the Transferable Nil Rate Band?

Whilst each of us has an individual IHT NRB of £325,000, spouses are able to benefit from a combined IHT threshold of up to £650,000 and this is called the ‘Transferable Nil Rate Band’ (TNRB). It is possible to transfer the unused NRB of the first spouse to die when the second spouse dies provided the death of the second spouse is after 9 October 2007.

By way of an example, if the first spouse died on 22 February 2010 and left his/her total estate to the second spouse, there would be no IHT on the first spouse’s death as the estate is IHT exempt. On the death of the second spouse on 16 March 2016, 100% of the first spouse’s NRB can be transferred. If the second spouse’s full NRB is available, then his/her estate will benefit from the full £650,000 IHT threshold.

What is the Residence Nil Rate Band?

From April 2017, an additional inheritance tax allowance called the Residence Nil Rate Band (RNRB) came into force.  The RNRB will be available on a person’s death in respect of a residential property owned by that person at the time of his/her death, which was at some time his/her residence and left to that person’s children, grandchildren, great-grandchildren (including step-children, adopted children and foster children).

 This additional inheritance tax allowance per person is £100,000 in 2017/2018, £125,000 in 2018/2019, £150,000 in 2019/2020 and £175,000 in 2020/2021. In the same way, as the Nil Rate Band, married couples and civil partners will be able to transfer any unused RNRB to the surviving partner.

The rules relating to the RNRB are very complicated, and there are a number of conditions that must be met for it to apply. As part of any estate planning consultation we will discuss with you your specific circumstances and whether the RNRB will be available to your estate and, if so, what steps can be taken to utilise it to mitigate inheritance tax.

The RNRB rules also allow an individual to claim the RNRB on a previously owned residential property which he/she does not own at the time of death which means that if you were to downsize or sell your home to move into residential care or with a relative, for example, then the RNRB may be available to your estate.

When might an inheritance tax liability arise?

There are a number of occasions where there might be a charge to IHT: 

• Unless your estate is exempt from inheritance tax on your death anything in excess of £325,000 will be taxed at 40%* unless the transferable nil rate band is available in which case the tax threshold could be up to £650,000 before any IHT is payable. 
• If you make a lifetime chargeable transfer (LCT) and it is in excess of your NRB the amount by which it exceeds £325,000 will be immediately charged to IHT at a rate of 20%. An example of an LCT would be if you decided to set up a trust – if you put assets of £400,000 into it, £75,000 would be taxed at 20% giving you a tax liability of £15,000.

As well as tax implications on the creation of the trust, there are a number of other tax implications to consider during the lifetime of the administration of the trust.  Therefore, take professional advice in relation to your trust is a suitable way of getting the best from your trust.

If you wish to set up a lifetime trust, you should take specialist advice because how the trust is structured will have an impact on how well your assets are protected and on your tax liability.  Cohen Knights LLP are a specialist provider in the creation and management of these type of trusts and have specifically developed different types of trusts which allow you to meet your objectives, and we guide you through the appropriate options for you. 

• If you make a lifetime gift of assets or cash, it is what is known as a Potentially Exempt Transfer (PET), and if you survive a period of seven years after making the gift, the PET will not be subject to IHT no matter what the value of the gift. If, however, you do not survive the seven-year period there may be an IHT charge, but this depends on a number of factors including how much of your NRB is available on your death and how many years you survive after making the gift.

 It is important to note that IHT is not simply a tax that can arise on death.

*If more than 10% of the net estate is left to charity, the rate is reduced to 36%.

How do I mitigate my inheritance tax liability?

With effective estate planning during your lifetime, you can structure your wealth and assets not only to maximise the value of your estate but so that you minimise what you pay in tax whether that is income tax, capital gains tax and of course inheritance tax.

The estate planning advice you receive from us depends upon your individual circumstances, and any solution we provide will be tailored to your requirements.  Our team of tax specialists would be happy to advise you of your options and whether you can make any IHT savings on your estate.

Can inheritance tax liability be mitigated after my death?

If you have effectively planned during your lifetime, you should have been able to put in place measures that will mitigate the tax on your death and enable you to pass on assets to future generations without a charge to IHT.  This is why it is so important to make a Will and take estate planning advice.

If you die intestate there is a strong likelihood that, unless your estate falls below the IHT threshold of £325,000, there will be an unwelcome tax liability. The intestacy rules are not designed with tax efficient solutions for families in mind!

And even if you do leave a Will if, for whatever reason, there is an undesirable tax result it may be possible to mitigate any IHT and CGT if applicable post-death by means of what is known as a Deed of Variation. If your beneficiaries or executors find themselves facing such a scenario, then our team of probate & estate administration experts will be able to advise on the appropriate course of action.

What tax advice do you provide for high net worth clients?

Our team of tax experts work closely with our wealth planning and asset protection team giving you access to tax and trust specialists with an intrinsic understanding of the unique needs of high net worth clients.

Structuring your wealth in ways that preserve your assets. Let us assist you in mitigating your liability to tax during your lifetime and help you to safeguard your wealth for future generations. If you have high net worth and seek advanced estate planning solutions contact us to discuss your requirements and to find out how we can assist you.

How Cohen Knights LLP can assist you

If you are seeking estate planning services and need advice on how to mitigate inheritance tax, we have the expertise to assist you.  Whatever your requirements and individual circumstances, we can provide innovative and pragmatic solutions to meet your needs.

If you would like to review any of your estate planning arrangements, our team of experts are here to help. Please contact us on 0333 1300 509 for more information or to arrange a FREE no-obligation home consultation with one of our advisers. We would be very happy to discuss your specific requirements.