A pretty massive topic – Inheritance Tax Solicitor Essex

Inheritance Tax planning is a fairly enormous topic. There are thousands of websites out there giving lots of information on how best to plan to avoid Inheritance Tax. As an Inheritance Tax Solicitor Essex, I have been dealing with advice on this topic for over 25 years now, and there are a lot of misunderstandings around as to what can be done to mitigate an Inheritance Tax bill.

How is Inheritance Tax calculated?

Basically, when someone dies, a snapshot of their finances has to be assembled, giving details of their estate worldwide. If their estate exceeds all of the available allowances and reliefs, then Inheritance Tax will be payable at a horrific rate of 40% on the chargeable estate.

What are the nil rate band allowances?

Each individual has a standard nil rate band allowance of £325,000. This figure has been fixed for many years and is a classic “fiscal drag” strategy implemented by the government where everything else becomes more expensive, and the tax allowances remain the same.
If someone is passing on the home to their descendants such as children or grandchildren, then there is also a residence nil rate band available of £175,000 against the equity in home.

What about married couples?

If assets are left by one spouse to the other, either absolutely as a direct gift, or into a life interest trust, these are covered by the spouse exemption, and cannot attract Inheritance Tax.

This often means that no nil rate band allowances of the first of a married couple to die are used. If this is the case, then these allowances can normally transfer to the estate of the surviving spouse and be claimed by their executors when that spouse dies.

In many cases that means that if all assets are left on the first death to the surviving spouse under the spouse exemption, and then the surviving spouse dies with the property equity in the family home worth £350,000 or more, there will be £1M worth of allowances attributable to the surviving spouse’s estate. Any remaining chargeable estate (above the £1M) will then be taxed at 40%.

What reliefs are available?

The main reliefs that are available against Inheritance Tax or Business Property Relief and Agricultural Property Relief. Both of these are complicated concepts.

Agricultural Property Relief

Broadly speaking this is available on land used for farming and certain conditions apply.

Business Property Relief

Business Property Relief is available on many business assets including certain types of investments that have been held for at least two years. This includes investments held on the AIM exchange.

Business Property Relief is not available on assets such as properties that are simply let out/rented.

What about lifetime gifting – why can’t I give assets away before death to defeat a claim by the Revenue?

The Revenue, unfortunately, have already thought of this. If you are giving assets away before death, it is necessary for you to give up all benefit that they might bring for at least 7 years after the gift has been made.

What can I give away?

You can actually give away as much as you but if you exceed the annual allowances, you create what is known as a PET (not a furry companion, but a “Potentially Exempt Transfer”). A PET may potentially affect your Inheritance Tax situation, depending on if you die within 7 years or not.

What about “taper relief” – surely this will apply on gifts I make after 3 years?

It is a common misconception that taper relief will be available after 3 years on large gifts. Taper relief, where the amount of tax tapers down, is only available on very large gifts in excess of £325,000, and even then it only applies to tax on the surplus above £325,000, whereby this tapers down after 3 years gradually to nil at 7 years.

What is the annual gifting allowance?

Each individual is allowed to give away a total amount of £3,000 in any one tax year. This is a total gifting amount they can give, and not £3,000 per recipient. In addition, it is possible to roll over any unused allowance from a previous tax year.

What about the small gifting allowance of £250?

This is also commonly misunderstood. It is possible to give £250 to any number of beneficiaries as a lifetime gift, but this cannot be given as well as using the £3,000 allowance. As soon as any more than £250 is given to one beneficiary, this counts towards the annual gifting limit of £3,000 and the small gifting allowance cannot be used.

Am I allowed to give away surplus income I receive, but do not spend?

Yes, you can, but this has to be done carefully to avoid problems with the Revenue raising issues on this after death. As always with the Revenue, it is extremely important to supply full and clear details to avoid queries being raised and awkward questions being asked.

Can’t I just use a trust to avoid Inheritance Tax?

Many people have heard this, but in most cases it is never that simple.

What about if I give my house to my kids – won’t that avoid Inheritance Tax?

Sadly not, the Revenue would class this as a Gift with Reservation if you carry on living there without paying a market rent, and would then treat this as part of your estate on your death.