The tax which applies to the value of your estate on death is known as Inheritance Tax (IHT). Its effects can be savage – everything left in your Will to a spouse or charity is exempt from IHT but otherwise the tax is 40% on the value of your estate above the Nil Rate Band (£325,000 for deaths after 5th April 2009). In addition it is possible to use up any unused Nil Rate Band of a deceased spouse or Civil Partner.

For deaths from 5th April 2017 a new Residence Nil Rate Band has been introduced for persons who leave their home to direct descendants. This increases the Nil Rate Band  and for deaths from 6th April 2020 effectively the Nil Rate Band will be £500,000. You should get advice as to whether this applies to you.

Remember that your house is included in the value of your estate. If your estate is likely to exceed £325,000 or £650,000 for a married couple or Civil Partners, then you should obtain professional legal advice as there are many way of mitigating the effects of this Tax.

Lifetime Gifts

If you can afford it, the best way to mitigate the effect of IHT is to give away assets or cash in your lifetime. Gifts made within 7 years of your death are taxed as a part of your estate subject to an Annual Exemption of £3,000 which can be given away every year tax free. The Annual Exemption is available to all individuals so a married couple can give away £6,000 per annum. Other exemptions are available in certain circumstances including wedding gifts to children or grandchildren.

Make a Will

Ensure that your Will is up to date. The rates of IHT tend to change each year. Indeed your Will may have been made many years ago when the Tax rates were very different or Tax was not a concern to you.

If you do not have dependants but also do not wish to pay any IHT then you may choose to leave certain individuals a legacy (such as nephews and nieces). Hence a Will leaving the Nil Rate Band to the nephews and nieces with the residue to charity (charities established in the UK are exempt from IHT) would prevent any IHT being paid on your estate.

If IHT is or may be a problem, there is no substitute for obtaining professional advice from a solicitor, accountant or Independent Financial Advisor.

Lifetime gifts of Assets into trust

It is possible to put assets into Trust for the benefit of dependents, with the proceeds of the Trust being out of the estate on death for IHT purposes. Typically life policies are put into trust for the benefit of children or grandchildren. The gift to the Trustees is subject to the 7 year rule. Professional advice should be obtained.

Any inheritance to a charity is free of IHT. If you leave at least 10% of your chargeable estate to charity then the rate of IHT drops from 40% to 36%.

Deed of Variation

Any inheritance to a charity is free of IHT. If you leave at least 10% of your chargeable estate to charity then the rate of IHT drops from 40% to 36%.

Any inheritance to a charity is free of IHT. If you leave at least 10% of your chargeable estate to charity then the rate of IHT drops from 40% to 36%.

This is a document drawn up within 2 years of a death whereby a beneficiary of an estate can redirect an inheritance to another person. There are many reasons why Deeds of Variation are made, but commonly the reason is IHT. For example, a wealthy son may wish to redirect his mother’s estate to his children so as to save IHT if the son were to die soon after his mother.

Charities

Any inheritance to a charity is free of IHT. If you leave at least 10% of your chargeable estate to charity then the rate of IHT drops from 40% to 36%.

For more information on IHT and other matters, please call 033 3344 9606 or 033 3344 9616 and ask for our Wills and Probate team.

For more information on IHT and other matters, please call 033 3344 9606 or 033 3344 9616 and ask for our Wills and Probate team.