Inheritance Tax (IHT) is paid at 40% on the value of a deceased’s estate that exceeds the IHT threshold.
The threshold currently stands at £325,000, though it can increase to £500,000 (using the £175,000 “residence nil-rate band”) if the deceased leaves their home to their children or grandchildren.
There are several ways for your clients to decrease their IHT liability on death, and even to decrease the rate at which tax is payable.
Here are five of them.
1. HMRC gifting
One way in which estate planning could help decrease an IHT liability is through gifting. HMRC allow funds to be given away in certain circumstances, taking those amounts out of the value of an estate for IHT calculation purposes.
Your clients can make use of exempted gifts of up to £250 to cover birthday or Christmas presents. Gifts they make to a spouse or civil partner during their lifetime are also usually IHT exempt. To lower their liability further, they might consider these exemptions:
It is possible to give away £3,000 worth of gifts each tax year using the annual exemption. The £3,000 limit is per individual and can be carried forward to a maximum of £6,000. This means that a couple could potentially gift £12,000 if neither made use of their exemption in the previous tax year.
Exempted gifts can also be made for weddings or civil ceremonies. Parents can gift up to £5,000, grandparents up to £2,5000, while non-relatives can gift £1,000.
Normal expenditure out of income
Clients can also make exempted gifts regularly if they can prove that the gift was made from income and didn’t detrimentally impact their standard of living.
This exemption could be used to pay into a child’s or grandchild’s pension or JISA, taking the gifted amount out of the value of the estate for IHT purposes.
2. Passing on unused pension pots
Current legislation makes it possible to pass on unused pension wealth in some cases and this can be a fantastic way to lower a potential IHT liability. Once a client takes their pension, it is treated as part of their estate for IHT purposes, but this is not the case for unused funds.
If your client has multiple pensions or has no immediate need for their pension funds, holding off – by saving a pension pot until last or planning not to take it at all – could be incredibly tax-efficient.
On death before age 75, unused pension funds can be passed to a chosen beneficiary tax-free. (Note that the beneficiary must be chosen through the pension provider, not via your client’s will.)
If death occurs after age 75, a chosen beneficiary can still receive the unused pension amount, but they will pay tax on it at their marginal rate.
3. Using a will
There are many reasons to have a will in place. It gives the deceased control over how their estate is distributed, makes their wishes known, and can limit additional stress and costs for those left behind.
A will can also help mitigate tax. Your clients might opt to leave a substantial portion of their estate to their spouse or civil partner, thereby exempting it from IHT.
As we have seen, leaving property to a child or grandchild can also be useful for reducing an IHT liability.
4. Leaving a charitable legacy
Co-op Legal Services reports confirm that charitable donations in wills increased by 56% in the 12 months to September 2020, while legacy gifts increased by 81% during the initial coronavirus lockdown between March and June.
A charitable legacy can make an enormous difference to a cause your clients care about. Remember a Charity Week is held in September each year but there’s no need to wait until then to support a worthy cause.
There are tax benefits to a charitable legacy too.
Charitable gifts fall outside of your client’s estate for IHT purposes so there is no tax to pay. Plus, donations of at least 10% of the net value of the estate at death reduce the IHT rate from 40% to 36%.
5. Speak to the experts
At Boolers we have extensive knowledge and vast experience of dealing with estate planning and can help your clients manage their affairs in the most tax-efficient way possible.
Discussing mortality isn’t easy and yet, while some trepidation is understandable, it is vital your clients talk about their plans. Putting steps in place to make their wishes a reality could give your clients a sense of control as well as peace of mind.
Get in touch
If you have clients that would benefit from discussing their estate planning, please get in touch. Email firstname.lastname@example.org or call 0116 240 7070.
The Financial Conduct Authority does not regulate estate planning, tax planning or will writing.
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