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Tuesday, 24 November 2015 11:45

2015/16 Year End Strategies - Your estate – lifetime planning for big tax saving

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Formulating an estate plan that minimises your tax liability is essential. The more you have, the less you should leave to chance.

If your estate is large it could be subject to inheritance tax (IHT), which is currently payable where a person’s taxable estate is in excess of £325,000 (the ‘nil-rate band’). The Government has announced an additional nil-rate band is to be introduced where a residence is passed on death to descendants such as a child or a grandchild. This will initially be £100,000 in 2017/18, rising each year thereafter to reach £175,000 in 2020/21.

IHT is currently payable at 40% on the value of taxable assets exceeding £325,000, and in some cases the value of assets given away up to seven years before your death can be brought back into account. So if you own your own home and have some savings and other assets such as shares and securities, your estate could be liable.

It is essential to start planning early if you want to minimise your exposure to IHT. We can help you, but here are some of the key areas to consider…

Take advantage of reliefs of up to 100%

There are a number of IHT reliefs available, perhaps most importantly relief on business and agricultural property, which effectively takes most of such property outside the IHT net. As always, there are detailed conditions, including a two-year minimum holding period, but business and agricultural property will generally attract 100% or 50% relief.

IHT exempt transfers between spouses

Transfers of assets between spouses or civil partners are generally exempt from IHT, regardless of whether they are made during a person’s lifetime or on their death. In addition, the nil-rate band may be transferable between spouses and civil partners. This means that if the bulk of one spouse’s estate passes, on their death, to the survivor, the proportion of the nil-rate band unused on the first death goes to increase the total nil-rate band on the second death.

David and Jane were married. David died in May 2008, leaving £50,000 to his more distant family but the bulk of his estate to Jane. If Jane dies in 2015/16 her estate will qualify for a nil-rate band of:

  • Nil-rate band on David’s death    £312,000
  • Used on David’s death    £50,000
  • Unused band    £262,000
  • Unused percentage    83.97%
  • Nil-rate band at the time of Jane’s death   £325,000
  • Entitlement    183.97%
  • Nil-rate band for Jane’s estate    £597,902


Other exempt transfers include:

•    small gifts (not exceeding £250 per tax year, per person) to any number of individuals
•    annual transfers not exceeding £3,000 (any unused amount may be carried forward to enhance the following year’s exemption)
•    certain gifts in consideration of marriage or civil partnership
•    normal expenditure out of income
•    gifts to charities.


Lifetime gifts

A programme of lifetime gifts can also significantly reduce the IHT liability on your estate. As long as you survive the gift by seven years and no longer continue to benefit from the gift yourself, it will escape IHT. Gifts also have the advantage of allowing you to witness your family members benefitting during your lifetime.

A discount can also apply where lifetime gifts were made between three and seven years before death (note that the discount applies to the tax on the gift rather than the gift itself, so, as above, these ‘old’ gifts can significantly increase the final bill unless we have been able to cover them for you with an exemption or relief).

Trusts

Trusts can be used to help maintain a degree of control over the assets being gifted, especially useful in the case of younger recipients. Life assurance policies can be written into trust in order that the proceeds will not form part of the estate on your death. Talk to us about using trusts to meet your planning needs.

Your Will

Your Will is your ultimate opportunity to get money matters right. You should review your Will at regular intervals to ensure that it reflects changes in your family and finances, is tax-efficient, and includes any specific legacies you would like to give, including tax-free donations to charity.

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