Inheritance Tax

The standard rate of taxation is 40%. A lesser rate of 36% may apply if you leave at least 10% of your estate to charity. There exists a Nil Rate Band of £325,000 which reduces the taxable amount. In some circumstances, an additional £175,000 (Residence Nil Rate Band) may also apply.

Methods of Reducing Inheritance Tax

Gifting Money

Making use of the £3,000 annual gift allowance and the £250 in small gifts allowance can be a tax efficient way to mitigate Inheritance Tax.

Indeed, gifting any quantity of money is one way of being tax efficient, as no tax needs to be immediately paid on money gifted.

However, if the individual who has gifted the money passes away before 7 years after gifting the money, up to 40% Inheritance Tax will be charged on the money gifted (dependant on Taper Relief).

Gifts to a Trust

However, gifting does not work in the same way for property. When property is gifted, Capital Gains Tax applies at 24% (or 18% depending on your tax band) of the gain made based off the market value of the property at the date of gift.

The alternate route to paying Capital Gains Tax on property gifted includes transferring property into a trust and claiming gift holdover relief (s. 260, IHTA 1984) so that the gifter does not pay Capital Gains Tax on gift but, instead, the base cost of the asset is reduced in the hands of the beneficiary by the amount of the gain the gifter would have paid tax on.

Note that the Inheritance Tax implications are the same for property as with cash if the gifter dies within 7 years of the date of gift.

Business Relief

This relief applies to the value of a business or its assets (e.g. machinery) which have been owned at least two years when calculating the inheritance tax liability. A relief of 50% or 100% (of the market value) will be applicable for qualifying assets. This relief can be passed on while the owner is still living or via the owner’s will.

There are several disqualifying factors, so care should be taken to consult expert tax consultants such as PD Tax Consultants.

Agricultural property Relief

This relief applies where your estate includes a farm or woodland area. This portion of the estate can be passed down inheritance tax-free (or at 50% relief in some cases), either during your lifetime or as part of you will. It must have been owned for two years by the owner, or 7 if occupied by someone else. 

There are several qualifying and disallowed examples of agricultural property, and, as such, careful consideration and expert tax advice should be considered to mitigate any potential pitfalls.

Leaving Money to a Spouse

Any inheritance received by your spouse or civil partner will not be liable to inheritance tax. This can therefore be an effective way to avoid inheritance tax.

Moreover, if your estate is valued at less than the threshold for the nil-rate band (£325,000), any unused threshold can be added to your partner’s or spouses’ threshold following your death.

Family Investment Companies

Following the 2006 change regarding lifetime transfers into trusts which taxed the excess of a transferor’s nil-rate bands at 20%, Family Investment Companies (FICs) have grown in popularity in comparison to trusts.

A FIC is a standard company where the shareholders are family members. The company is structured such that parents retain control whilst growing wealth outside of their estates to pass down the generations.

The main benefit of a FIC is that any money transferred into a FIC is classed as a “partially exempt transfer” which means any amount you transfer will fall outside of your estate for inheritance tax purposes if you survive 7 years from the date of transfer. This is different from the chargeable lifetime transfer that applies to trusts.

Summary

If you feel that the information above has some relevance for you, and you wish to begin your planning for your legacy to mitigate future inheritance tax liabilities, please contact a member of our team.

Disclaimer: This article is for general information only and is not intended to constitute individual advice. It is recommended that you seek independent tax advice before taking steps to structure your succession planning.