Planning to Save Inheritance Tax 2019 / 2020
As Benjamin Franklin recognised, “nothing can be said to be certain, except death and taxes.” Inheritance tax is where the two certainties meet.
Careful planning can help to reduce your liability to Inheritance Tax so that your loved ones receive more of your hard-earned wealth, and the government receives less.
Starting Point: Inheritance Tax Rates and the Nil Rate Band
Inheritance Tax is payable at the rate of 40% of the value of you estate over and above your nil-rate band. Your estate includes any assets, properties and savings after any debts you have and funeral expenses have been met.
The nil-rate band for the tax year 2019 / 2020 is £325,000.
The 40% tax rate is only charged on the part of your estate above your £325,000 threshold.
House values mean that more and more working people have estates that exceed the £325,000 threshold.
Marriage and Civil Partnerships
If you leave everything to your spouse or civil partner, then they will have no Inheritance Tax to pay, no matter what the value of your estate is. Even if the estate is worth more than the £325,000 nil-rate band, your spouse or civil partner will pay nothing.
So long as everything is left to your spouse or civil partner, your nil-rate band is then added to your spouse or civil partner’s nil-rate band. The combined nil-rate band applies to all of their estate, so their estate will now have a £650,000 nil-rate band.
That means that whoever they leave their estate to, the estate will only be liable for Inheritance Tax on its value over £650,000.
The Residence Nil-Rate Band
The residence nil-rate band will apply if you have a property which is your main residence that you pass on to any of the following relatives:
- Children and their spouses or civil partners
- Grandchildren and their spouses or civil partners
- Great-grandchildren and their spouses or civil partners
- Adopted children
- Foster children Children who were under the guardianship of the people passing on their estate.
It works by adding an additional amount to your nil-rate band up to the value of your main residence. In 2019/2020 the amount is an additional £150,000. It will rise to £175,000 in 2020/2021 and then continue to rise in line with the Consumer Price Index from 2021/2022 onwards.
Even if you have sold your main residence before you die, the Residence Nil-Rate Band may still apply to the proceeds of sale and any assets you have purchased with them.
For 2019/2020, if you are passing your main residence to your close relatives, then your nil-rate band including the Residence Nil-Rate Band will be £325,000 + £150,000 = £475,000. From 2020/2021, the Nil-Rate Band will be £325,000 + £175,000 = £500,000.
Just like your nil-rate band, the benefit of the Residence Nil-Rate Band will pass to your spouse or civil partner. That means that in 2019/2020 if you pass all of your estate to your spouse, including your main residence, then they can subsequently pass on the estate up to £950,000 to a close relative without any Inheritance Tax becoming payable. This will increase to £1million in 2020/2021.
Planning to Save Inheritance Tax
The starting point when planning to save Inheritance Tax is to consider what you want to do with your property and whether any Inheritance Tax would be payable in any event.
If you would have liability for Inheritance Tax, then there are a number of ways that you can legally reduce the liability for Inheritance Tax.
- If you give a gift (of any value) then there is no inheritance tax to pay, so long as you live for seven years after giving the gift. Any gifts that you give within the seven years prior to your death will still be counted as part of your estate. It is important to start planning early. If you are making large lifetime gifts, then the beneficiaries can take out life insurance to mitigate against any Inheritance Tax that becomes payable should you die within seven years.
- Certain types of trust can result in a reduction in Inheritance Tax. It’s a common misconception however that there is no Inheritance Tax at all on assets put into a trust. While tax rates may vary depending on the type of trust, for a typical lifetime discretionary trust, tax rates will be 20% of the value of the assets in the trust over the nil-rate band when the Trust is formed, 6% every 10th anniversary and up to 6% on exit. There are normally fees associated with setting up and managing a trust, so you need to carefully consider the pros and cons of setting up a trust and whether it will be of benefit.
- Pensions can be your secret weapon in Inheritance Tax Planning. Defined contribution pensions – that is to say pensions where you save money to build a pot that is invested – have special tax rules that mean that they can be passed on without being a part of your estate for Inheritance Tax purposes. Depending on how old you are when you die, your beneficiaries may receive the whole amount without owing anything to HMRC. The key age is 75. If you die before 75, the entire amount can be passed on tax free. Your spouse or your children are able to spend it when they want without incurring a tax bill – so long as they take it within two years. They don’t have to be over 55, which is the normal cut-off age for taking a pension. After your 75th birthday, there are tax implications. However, the bill may still be lower than if the money was left outside of a pension. Transferring assets, property or money into a defined contribution pension can be an effective way of reducing the tax liability.
- You can give away up to £3000 each year tax free. You can also roll this over for one year (no more) and give away £6000 in the next year. If you have an estate exceeding the threshold it is worth considering giving away this £3000 gift yearly to your loved ones.
- You can also give away £250 per year to everyone you know, with no cap on the overall amount. If you have a number of children and grandchildren consider giving them £250 each year as a birthday present, and it won’t be considered as part of the estate for Inheritance Tax purposes.
- Any gifts to charities and political parties are Inheritance Tax free.
- Gifts given in consideration of marriage are also tax free, subject to limits: £5000 from a parent, £2500 from a grandparent and £1000 from anyone else.
- If you own agricultural property that is part of a working farm, that may also be exempt.
If in doubt, get professional advice
The key takeaway is that if you think you may be liable for Inheritance Tax, take professional advice regarding your plans, your estate’s potential liability for Inheritance Tax and ways in which you can reduce the Inheritance Tax liability to ensure that more of your hard-earned assets end up with those that you love, rather than being paid as tax.
If you want a free initial discussion about your circumstances and how QA Law can assist you with planning for your future, and protecting your family and loved ones, don’t hesitate to get in touch on 033 33 034 680. Our friendly experts are waiting to assist you, with no obligation.