There Are Two Things Certain in Life – Death and Taxes

With the recent health and social care levy putting up national insurance contributions there has been a lot of talk about who and what should be taxed. As a private client solicitor at every budget I pray that the changes are not going to be to the taxes I deal with so the advice I give on a day to day basis doesn’t need to change. However unfortunately for my profession and those individuals who are subject to inheritance tax the head of the Asset Allocation Research at Rathbones has said that an increase in inheritance tax is inevitable.

At the moment the inheritance tax rate sits at 40% and I often find clients are disgruntled by paying inheritance tax as they have already been income taxed on the money they are passing to their beneficiaries. So how would a change the inheritance tax regime actually go down?

Well, the reality is that there are a wide variety of tax planning measures in place which can help reduce your Estate for inheritance tax purposes.

Tax Legislation

The first is not really a tax planning measure as it involves the legislation itself. Provided an individual has access to their full nil rate band, each individual is allowed £325,000 worth of assets before they pay inheritance tax on their death. If they are married and leave their Estate to their spouse then this can be transferred and a couple may then have access to £650,000 worth of nil rate band on the second death of the couple.

There is another nil rate band which could be available to an individual and can be transferred within a married couple. An individual whose Estate is worth less than £2million can access a residence nil rate band of £175,000 to be applied to property which is passed to lineal beneficiaries.

Charitable Gifts

If you leave a gift to charity this part of your Estate will not be taxable. So if you gave a gift of £20,000 to the Alzheimers Society your Estate would technically be reduced by £20,000 for inheritance tax purposes.

Charitable gifts can also reduce the rate of inheritance tax from 40% to 36% if you leave 10% of your total Estate to charity.

Gifts to Other People

There are certain rules surrounding gifting to non-charitable beneficiaries. If there were not any restrictions surrounding gifting it would be very easy to be an inheritance tax advisor as you could gift away your entire Estate on your deathbed. However if you die within seven years of making a gift, unless it is very large, it will be included in your Estate for the purposes of inheritance tax.

However, there are some exceptions to this rule. There is an allowance of £3,000 per year of gifts that are able to be made without it being included in your Estate.

Where there are special events such as a marriage there can be an increase in your yearly gifting allowance. It is important to look in detail at the rules surrounding gifts which can be given at certain festivities as an incorrect understanding of the rules could lead to a gift being unintentionally included in your Estate.  

It is also possible to give regular gifts out of your income. These gifts are designed to be from your excess income and should not change your lifestyle.

Many people take advantage of gifting in order to reduce their Estates for inheritance tax. At Aquabridge our approach to tax planning is to work with accountants and financial advisors to give holistic tax planning advice. Should you wish to discuss tax planning matters please contact Samuel Flower at sflower@aquabridgelaw.co.uk or Lorna Bastian at lbastian@aquabridgelaw.co.uk