I am sure that you will be familiar with the popular quote “the only two certainties in life are death and taxes”.  

When a person dies, Inheritance Tax (payable to HM Revenue & Customs) may become due on an estate. It is important to consider Inheritance Tax planning in your lifetime to minimise a potential Inheritance Tax bill when you pass away.

At Birkett Long LLP, we will provide you with Inheritance Tax planning advice for you to put the appropriate measures in place so that you maximise your tax-free allowances and reduce the amount of Inheritance Tax ultimately payable to HM Revenue & Customs.  This, in turn, means that your loved ones will inherit a greater share of your estate and it will not be consumed as much by taxes.

The first step is to work out the total value of your assets and consider whether Inheritance Tax will be payable on your estate and if so, by how much.  

What are the current Tax allowances?

Every person has a “Nil Rate Band” allowance of £325,000. This means that they can pass assets up to this value on their death and it will be taxed at 0%. If you own a property at your date of death and you leave it to a direct descendant, you can claim up to £175,000 in a “Residence Nil Rate Band” allowance, which again will be taxed at 0%. 

There are various qualifying factors that must be met, and we can discuss with you what these factors are.

Married couples and civil partners can pass their estate tax-free to their spouse when they pass away. Therefore, it is also possible for spouses and civil partners to transfer any unused Nil Rate Band and Residence Nil Rate Band allowances to the surviving spouse, which in effect doubles the allowances available on the second death.

 Any assets over the Tax allowances in place will be taxed at 40%.

Who pays the Inheritance Tax?

Inheritance Tax is paid by the executors appointed under the deceased’s will, or the administrators if there is no will in place, and it will be paid from the deceased’s assets.

Reducing your Inheritance Tax bill

There are various ways you can reduce your Inheritance Tax bill and to be effective it must be done in accordance with the current Tax guidelines.

One option is to gift your assets in your lifetime. 

Gifts can be anything that has a value, such as money, property, personal goods or a loss of something transferred. Gifts made during your lifetime can fall into several categories and each has different Inheritance Tax consequences, as follows: 

A)  Certain types of gifts are classed as “exempt gifts” which means the gifts reduce the size of your assets and tax is not payable when you make the gift and on your death. 

A person has an annual allowance of £3,000 that they can gift away each tax year, without any tax consequences. In addition, there are various smaller gifts of up to £250 that you can make, for example, for your child’s birthday etc.

 B)   A transfer into a Trust (except a Disabled Interest Trust) is immediately chargeable. 

C)  Gifts that are potentially exempt transfers. Inheritance Tax only becomes payable if you pass away within seven years of making the gift. Gifts made within three to seven years before your death are taxed on a sliding scale known as “taper relief”.  

D)   Gifts out of surplus income. 

E)   Gifts to spouses and civil partners are usually exempt. 

F) Gifts to charities are exempt. 

Other ways to reduce Inheritance Tax include:

• lifetime Trusts

• Business Property Relief

• Agricultural Property Relief

• Pension benefits 

We can discuss the various qualifying factors that must be met with you. 

Other things to consider

 1.         Make a will

A will is a legal document where you list who you would like to inherit your estate when you pass away. By ensuring that you have a will in place, it means that your loved ones have been well provided for and ensures that your estate is distributed in a tax-efficient way. 

2.         Lasting Powers of Attorney

There are two types of Lasting Powers of Attorney:

1. One that covers your Property & Financial Affairs 

2. One that covers your Health & Welfare

A Lasting Power of Attorney allows you to appoint “attorneys” who are legally appointed to deal with your affairs during your lifetime in the event that you are not able to. 

For example, if you have lost mental capacity and you have a Property & Financial Affairs Lasting Power of Attorney in place, then your attorney can look after your finances and will be able to make tax-efficient decisions regarding your assets. 

There are various things that you can put in place during your lifetime to reduce a potential Inheritance Tax bill. We will talk you through the pros and cons of doing so, by way of an initial meeting with you or preparing a detailed Inheritance Tax report based on your current circumstances.

If you would like any Inheritance Tax planning advice then please do not hesitate to contact me on 01206 217609 or leah.woodnott@birkettlong.co.uk.