Inheritance Tax Planning Specialist Advice

Inheritance Tax Advice

Death isn’t an easy subject to talk or think about so it can often be difficult to face up to the surrounding issues such as Inheritance Tax. Furthermore, Inheritance Tax can be a highly complex area meaning planning may seem like a daunting task. As a result, it is often ignored resulting in overpaid liabilities, when in a lot of cases a few small steps could save thousands.

At Perrys Chartered Accountants, our in-depth knowledge and expertise ensure that all bases are covered, and that the process is as straightforward as possible. We keep you abreast of the latest changes to Inheritance Tax rules and legislation, and work to minimise your potential liability as far as possible.

What is inheritance tax planning?

IHT planning is the process of understanding potential tax liabilities and taking steps to keep those liabilities to a minimum. One of the barriers to the process is that death isn’t an easy subject to talk or think about, so it can be difficult to face up to the issues surrounding inheritance tax. It is also a daunting subject. As a result, IHT planning is often put off until it is too late, resulting in overpaid taxes, when in a lot of cases a few small steps could save thousands.

Planning for IHT begins with a review of what you own, including property, possessions, shares, savings, pensions and other assets. If you are the owner of all or part of certain businesses, or of property or equipment used by a business, these will also need to be included in a planning review. The key issue is to arrive at a value for your estate that is as accurate as possible.

The next stage is to understand potential IHT bills for your estate and your beneficiaries. The threshold for paying IHT is known as the nil-rate band or NRB (£325,000 in 2022/23) which is currently well below the average value of a home in the south-east, and far below the value of many estates.

However, a range of exemptions and allowances are available which significantly reduce IHT liabilities. A key exemption comes under the residence nil-rate band (RNRB) which allows a further band of residential property value to be tax-free (£175,000 in 2022/23) if the property is left to children or grandchildren. Combined with the nil-rate band, this gives a significant increase to the tax-free exemption.

Professional advice is key to fully understanding the detail of all the complexities of what is, and what is not, exempt from IHT. However, key issues are as follows:

IHT planning for married couples

For couples who are married or in civil partnerships, all property and assets can pass to the surviving spouse free of tax, regardless of value. The issue is more complicated for co-habiting couples, and other ways of passing on property and assets need to be explored.

IHT planning and gifts

Giving away part of your estate during your lifetime is an important way of avoiding IHT. Strict limits apply on the value of gifts. The number of years between making the gift and your death affects the amount of IHT payable., tapering from the full amount if less than three years to zero if over seven years.

The annual exemption (2022/23 figures) on gifts is £3,000 excluding small gifts of £250 or less, with further exemptions of up to £5,000 for gifts to children getting married or entering a civil partnership. For grandchildren, the wedding/partnership exemption is £2,500 and for anyone else it is £1,000.

By carefully planning around the timing and value of gifts, you have an opportunity for tax efficient transfer of assets up to a limited value.

IHT planning for wills and trusts

Making a will is often put off by people, not least because it involves thinking about death. Even so, it is very important to have a will in place for many reasons, including IHT issues. If you die without a valid will, handling your estate becomes more complicated and subject to delay. Probate will take longer, and can prevent dependents and members of your family from accessing funds from your estate at a time when they need it.

A valid will also allow you to distribute your estate as you want. Without a will, your assets will be bequeathed following a formula set out in law which may not represent your wishes. The rules of intestacy (2022/23) mean that a surviving spouse or civil partner gets the first £270,000 of your estate and 50% of the rest, while the balance goes to any surviving children, grandchildren or great grandchildren. In the case of cohabiting couples, the surviving partner does not, by law, inherit any part of the estate.

Trusts are a further topic for IHT planning. By transferring an asset to a trust, it is no longer part of your estate and it is not considered for IHT. Control of the asset goes to the trustee or group of trustees, although when you write the trust you can lay down conditions on when and how the asset is used. For example, you can specify that the asset is released on a child’s 21st birthday, or that funds are used for a specific purpose.

Why is IHT planning complicated?

IHT is something of a political hot potato, and gives rise to strong feelings across the political spectrum. It is subject to significant reviews and change, such as the introduction of the residence nil-rate band in 2017. Keeping up-to-date with amendments, as we do at Perrys, is essential for optimising your IHT plans.

There is also a range of legislative nooks and crannies to navigate for privately held and business assets. Without extensive knowledge of the legislation, it can be easy to miss out on various allowances and exemptions, and to end up overpaying IHT.

Inheritance is further complicated by probate, the process of administering your estate after you die. Probate depends on supplying extremely detailed information about an estate in order to ascertain its value. A long list of probate forms is available from the government to cover multiple types of asset from personal goods to pensions, life assurance policies and overseas holdings. Completing probate can be intensely time-consuming and involve extensive research into financial information held by all types of organisations.

If there is no valid will, almost every aspect of inheritance become still more complex and onerous. Furthermore, when it comes to payment of IHT, the deadline is set at six months after death. Yet probate can often take longer than six months, so an accurate figure for the value of the estate is frequently not available.

If IHT is not paid in full by the deadline, interest becomes payable, leaving the estate administrator with the decision of how much to pay when the deadline arises. Payments made prior to IHT deadlines are known as payments on account, but the full balance of outstanding tax and interest still needs to be paid in due course. Overpayments and related interest will be refunded.