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Top 10 Last Minute Inheritance Tax Planning Tips
- AuthorPaul Rothwell
Ten important items for you to consider before 6 April to reduce inheritance tax on your estate.
Tax planning is an important part of your annual spring cleaning. If you want to take advantage of the allowances available to you this tax year, it is important to take action before the tax year ends on 5 April. Your window of opportunity to get this done in tax year 2017/18 is about to close!
The majority of our clients who own property in the south east of England would not consider themselves to be ‘wealthy’, but the reality is the value of their property may trigger a significant charge to inheritance tax, if they do not take time to review their circumstances and make proper use of the allowances and exemptions available to them.
Set out below is a list of some of the steps people should consider if they want to try and reduce a future charge to inheritance tax.
- Small Lifetime Gifts of Capital: You can make a gift of assets and/or money up to a total of £3,000 in value each tax year. You can also make as many small gifts of up to £250 as you like, as long as you have not used any other exemptions on the same person.
- Wedding Gifts: Be generous if there is a wedding. A parent can make a gift of up to £5,000 to a child if they are getting married, without it having any inheritance tax consequences. A grandparent can make gift to a grandchild of up to £2,500 if they are getting married. Other friends and family members can make a gift of up £1,000 to someone getting married.
- Significant Lifetime Gifts of Capital: You can give away as much money or as many assets as you like, provided you make an outright gift of them. As long as you survive a period of seven years from the date of making the gift, it will fall outside your estate for inheritance tax. This is known as a ‘Potentially Exempt Transfer’ (PET), as it is potentially a transfer free of inheritance tax. Before giving assets or money away, you must make sure you can afford it, because in order for a PET to be effective, you cannot have any further call on or benefit from the assets or money you have given away. For example, if you make a gift of your home to someone else and continue to live in it, the value of your home will continue to form part of your estate for the inheritance calculation, regardless of how long ago it was since you transferred it.
- Regular Gifts Out of Income: If your income exceeds your expenditure, you are able to make a gift of your disposable income, without it having any inheritance tax consequences. If you wanted to do this, you must make sure there is a regularity and frequency to the payments you make and ensure the payments do not negatively impact on your current standard of living. You should keep a good record of your income and expenditure if you would like to take advantage of this.
- Child Trust Funds: Grandparents can give money to their grandchildren which their grandchildren can then save. Any interest earned by the money gifted to the grandchild can be set against the grandchild’s personal income tax allowance of £11,200. In most cases therefore there will be no tax to pay on the interest. If the parents do the same thing, any interest above £100 a year is treated as the parents’. However, do bear in mind the child will gain access to the money on their 18th birthday and have control of it.
- Consider the Inheritance Tax Allowance: The first £325,000 of your estate is chargeable to inheritance tax at a rate of 0%. This is known as the nil rate band. Inheritance tax on assets you have that exceed your nil rate band is charged at 40%, although the rates are reduced or eliminated completely if you leave money to a surviving spouse, civil partner or charity.
- Passing Wealth to Your Spouse or Civil Partner: Couples who are married or have formed a civil partnership can pass unlimited assets to the survivor of them on first death, without any charge to inheritance tax. The survivor can also make use of the unused nil-rate band that passed to them on first death. With careful planning, a married couple and civil partners can release up to £650,000 on the survivor’s death free of inheritance tax.
- Inheriting the Family Home: The government introduced a Residence Nil-Rate Band (RNRB), for parents or grandparent’s looking to pass their family home to their children or grandchildren. The RNRB can only be claimed in certain circumstances, so it is important your estate is structured in such a way to make best use of this additional allowance. Since 6 April 2017 the RNRB has enabled each parent or grandparent to pass the first £100,000 of their family home on to the next generation without a charge to inheritance tax. The RNRB is set to rise in each tax year until 6 April 2020 when it will have increased to £175,000. In the subsequent tax years, it will rise in line with the Retail Prices Index. Therefore with careful planning, parents or grandparents who own property could release up to £1m to the next generation of their family, without there being a charge to inheritance tax, if all the inheritance tax allowances are utilised.
- Pensions: The rules in relation to pensions have been changed in recent years. If you die before you are 75, you can now pass on your pension fund to someone else without a charge to inheritance tax. If you die on or after 75, there is still no inheritance tax to pay but the recipient will be taxed at a marginal rate of tax on the income they draw down from it.
- Get Advice: Everyone’s circumstances are different. It is important for you to build up a relationship with a trusted network of advisers, who will be able to offer you ways to reduce your potential liability to inheritance tax, before the current tax year ends.
What to do now?
At Martin Tolhurst Solicitors we have team of lawyers that specialise in the preparation of wills, tax planning and estate administration. We can work with you to make sure you are making best use of the allowances and exemptions available to you. If you do not get round to meeting with us and getting advice this tax year, why not make a new tax year resolution and meet with us early in the new tax year to make sure we can make the best of the new allowances you are about to receive. Contact our new enquires team on 01474 545013 or email firstname.lastname@example.org today.
The content of this article is intended for general information purposes only and shall not be deemed to be, or constitute tax advice. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article. You should consider your assets and deal with tax planning under the guidance of a tax adviser, accountant or solicitor only.