Insights

If you are worried about the impact of inheritance tax (IHT), which is payable on estates valued at over £325,000, here are 10 ways you can mitigate its impact before the end of the current tax year on 5^th April 2017. What are the best ways to minimise inheritance tax?

1. Review your assets

Provided they have been held for two years, some assets qualify for 100% relief against IHT. These include agricultural assets, shares in private trading companies (including those listed on AIM) and trading partnerships. It may also be possible to establish a discounted gift trust to benefit from tax relief whilst retaining a lifelong income. Consider transferring an existing share portfolio into qualifying unquoted shares, or investing in a business or agricultural asset.

2. Leave the family home to a direct descendant in your will

The residence nil rate band (RNRB) will start to become effective from the 2017/18 tax year, when a family home is passed to a qualifying direct descendant on death. This will initially mean an extra £100,000 allowance, rising to £175,000 by the 2020/21 tax year. Provisions are in place to allow any unused RNRB to be transferred between husband and wife or civil partners and this also includes situations where a death occurs before the relief comes into effect in April 2017. Note that the RNRB is tapered away for estates with a net value of more than £2m (before reliefs and exemptions).

3. Give part of your estate to charity

If you leave at least 10% of your estate to charity in your will, your family will pay a lower inheritance tax rate of 36% rather than the usual rate of 40%.

4. Reduce the value of your estate below £325,000

If you can give away funds in your lifetime to bring the value of your estate below the nil rate band on death, no IHT will be payable on your estate, providing you survive for 7 years following the gifts and do not retain a benefit in them. Note that gifts made during lifetime or on death to a spouse or civil partner are tax free. We have covered the benefits of lifetime giving in a previous blog as a strategy to minimise inheritance tax.

5. Leave your ISA to a spouse or civil partner

Income and gains from an ISA are tax free but the overall value of an ISA forms part of an estate upon death and may be taxable. This can be overcome if it is gifted to your spouse or civil partner in your will. This offers the added benefit of enabling the funds to remain in the tax-free ISA wrapper, allowing your spouse to receive tax-free income and capital growth after your death, even where they already have their own ISA.

6. Revisit IHT planning that involves borrowing

Rules introduced from 17 July 2013 have changed the way that some debts are treated when an individual dies. Now, for loans made after 6 April 2013, the value of the loan may need to be deducted from the asset it was used to buy, repair or maintain, rather than against the total estate, which can remove IHT savings. In certain circumstances, it will be necessary to update a will accordingly.

7. Update your will

It is important to regularly review your tax planning strategies and update your will if you want to retain all possible tax saving advantages and minimise inheritance tax, because circumstances and tax rules both change.

Currently, married couples and civil partners have up to twice the nil rate band (£325,000) available on the second death. If the nil rate band is partly utilised on the first death, the percentage that is not used can be later used by the surviving spouse. If on the first death, the whole estate passes to the surviving spouse, then 100% of the deceased's nil rate band will be available for use on the survivor's death; when the surviving spouse or civil partner dies, the unused percentage will be applied to the nil rate band applicable at the date of the second death to enhance the nil rate band for the second estate.

8. Establish a trust

Although they no longer offer as many tax advantages, trusts remain useful as vehicles for protecting family wealth. By choosing appropriate trustees for the future, and ensuring your wishes are known, it is also possible to retain a degree of control over how assets held in trust are used in the future.

9. Leave your pension to family members

It has always been possible to leave your pension to family members with tax relief benefits. Now, there are revised rules in place for individuals over the age of 75 who die with funds remaining in their pensions, where the amount of tax payable by the beneficiaries has been reduced. This is relevant for taxpayers with defined contribution pensions. The new rules allow beneficiaries to access funds over several tax years to manage the amount of tax they must pay – children for example are likely to have no tax liability. It is important to seek financial advice about this and possibly update your will.

10. Non-UK domiciled individuals should review their assets and estates

Assets transferred from a UK domiciled spouse or civil partner to a non-UK domiciled spouse or civil partner, whether during lifetime or on death, are exempt only up to a limit of £325,000. This contrasts dramatically with other such inter-spouse transfers which are entirely exempt. Individuals who are non-UK domiciled but have a UK domiciled spouse or civil partner can elect to be domiciled in the UK for IHT purposes only, which gives them the entitlement to tax free transfers of assets. However, where such an election is made, the worldwide assets of the individual fall within the UK inheritance tax net. If you are in a mixed domicile marriage or civil partnership, you should review your situation before making any transfers.

If you would like more detailed end of year tax planning advice, please contact us directly by emailing partners@rjp.co.uk.