This advice could help you reduce your inheritance tax
Inheritance tax is often called ‘the voluntary tax’ because there are exemptions, allowances and planning measures that can reduce or eradicate a liability. The key to reducing an inheritance tax bill is taking good advice, and acting on it.
What is inheritance tax?
Inheritance tax is a tax levied on an individual’s wealth when they make a chargeable transfer. For the purpose of this article, we will focus on transfers made on death.
Each individual has a tax-free allowance called the nil rate band (NRB). Any amounts passed on after their death exceeding NRB are subject to a tax charge at 40%, unless an exemption can be claimed.
The Nil Rate Band
This is the tax-free allowance and is currently set at £325,000 per person—a level at which it is expected to remain for the foreseeable future.
Married couples and civil partners can carry over any unused NRB on first death, meaning a total of £650,000 is available on current thresholds.
Exemptions and allowances
The most commonly used exemption is ‘spousal exemption’. This allows married couples and civil partners to make unlimited gifts to a surviving spouse or civil partner completely free of inheritance tax.
It is also possible to make tax free gifts to registered charities and political parties. Indeed, making gifts to charities that exceed 10% of an individual’s estate can actually reduce the rate of Inheritance Tax applied to the remaining estate to 36%.
There are also other exemptions, such as ‘business property relief’, which can be claimed at either 100% or 50% on relievable property linked to a business, and ‘agricultural property relief’, which can be claimed at 100% on qualifying agricultural assets.
Potentially Exempt Transfers (PETs)
Sadly in tax talk, a PET isn’t warm and fluffy, but an acronym used to describe a gift made by an individual in their lifetime, which, if they survive the gift by seven years and retain no interest in it, will be removed entirely from their Inheritance tax calculation.
An additional Nil Rate Band attached to the family home
There is currently draft legislation at a consultation stage that intends to provide home-owners leaving their home to a direct descendant with an additional tax free allowance.
How this legislation will look when it actually becomes law is uncertain, but the premise is to provide an additional tax free allowance of up to £175,000 per person by 2020.
Advice is the key
Good tax planning starts with good advice. Contact Reader’s Digest Legal for more information.
Note: the contents of this article should not be construed as advice or relied upon for the purpose of any tax planning exercise. Inheritance Tax is a complicated area and personalised advice must be sought from an appropriate source