Here are 10 ways people can reduce or mitigate a potential inheritance tax liability.
Benefiting from two nil rate bands
UK-domiciled married couples and registered civil partners are allowed to pass assets to each other during their lifetime or when they die without having to pay inheritance tax. This is known as spouse or civil partner exemption.
The survivor of a marriage or civil partnership can claim up to 100 per cent of their partner’s nil rate band (assuming it was not used on first death) in addition to their own entitlement, providing an allowance of up to £650,000.
Main residence nil rate band
The residence nil rate band is available for individuals who pass on their main residence to direct descendants such as children or grandchildren. This also includes step-children, adopted children and foster children. It effectively acts as an increase to the existing nil rate band of £325,000 per person.
The new band will be introduced in phases starting in April 2017 at a rate of £100,000, rising to £125,000 from April 2018, £150,000 from April 2019 and to £175,000 from April 2020. If unused, the allowance can be transferred to a spouse or civil partner on death, meaning a couple could have a combined nil rate band of £1m from 2020.
However, if the net value of the deceased’s estate (after deducting any liabilities but before reliefs and exemptions) is above £2m, the additional main residence nil-rate band will be tapered away by £1 for every £2 that the net value exceeds this amount.
Wills
People need to have a valid will to ensure their assets are passed on as they wish, which can take into account tax efficiency. It needs to be reviewed regularly and updated if circumstances change. Wills are automatically revoked upon marriage and revoked in part on divorce.
Gift allowances
Gifting assets can reduce the size of an estate for inheritance tax purposes. People can gift up to £3,000 a year, which is immediately exempt from inheritance tax or £6,000 if they did not make a gift in the previous tax year.
People can gift £250 to any number of people every year, but they cannot combine this with the annual £3,000 exemption. Parents can gift £5,000 to their children in contemplation of a wedding or civil partnership, grandparents can give £2,500 and anyone else £1,000.
If gifts are intended to be made on a regular basis, come out of income, and do not affect the donor’s standard of living, they can be ignored for inheritance tax. For those with larger incomes, this can make a significant difference to their potential tax liability.
Gifts to registered charities and political parties are exempt and if people leave 10 per cent of their net estate (that is, after the nil rate band has been taken into account) to a qualifying charity any tax due may be at a reduced rate of 36 per cent rather than 40 per cent.
