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Inheritance Tax Planning
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How many times would you like your family to pay inheritance tax on your estate? If you responded: ‘at most once, ideally never’, pull up a chair.
When a person dies, the assets the newly dead person held in their name at the moment of death would be totted up. It is on this totting up, that the taxable estate, thus the inheritance tax liability would be calculated.
The only way you may reduce inheritance tax is to reduce your taxable estate. With inheritance tax planning you would reduce the amount of the taxable estate.
You would, with inheritance tax planning, reduce your taxable estate in a manner that suits your circumstances, lifestyle and expectations.
Everyone is allowed to give away the nil rate band, NRB, £325,000. All gifts greater than the NRB, attract inheritance tax at 40%. Most people may claim a further allowance, the residential nil rate band if they own residential property and leave the value of that property to close descendants such as children and grandchildren.
So far, so simple.
Inheritance tax isn’t that simple, if it were, you’ll not be reading this.
Simple? Inheritance tax calculation
I’m old enough to remember the Rumble in the Jungle, that famed fight between George Foreman and Muhammad Ali.
Foreman made a gift of the boots he wore at the contest to my next-door neighbour Jacqueline who was born on the day of the fight.
Auctioneers value the boots at £150,00. But, a single boot is worth £60,000.
Jacqueline, gave her brother one of the shoes. For inheritance tax purposes, she has only £60,000 worth of footwear left, therefore she has made a transfer of value of £90,000 – her brother, owning one shoe, has as £60,000 asset. However, if Jacqueline died within seven years of the gift. inheritance tax might be payable on £90,000. It is on such mathematical ju-jitsu, inheritance tax calculations are based.
There are scores of rules, exemptions, and allowances to inheritance tax; you’ve heard of ‘gifting’; ‘the 7-year rule’; ‘the 10% threshold’; these like all other terms you might have heard of are tactics to save inheritance tax. Inheritance tax planning uses these tactics and more to ensure you pay the right amount of inheritance tax – as near zero as the law allows you.
More useful than mere tactics is an assessment of your family and financial circumstances and blending this with an understanding of how inheritance works, who pays it, and when they pay it. Most folk ignore the when.
He who fails to plan
Inheritance tax, like all taxation is the age-old question of rendering on to Caesar as is Caesars… and the rest we preserve for your family. The good news is that Caesar only wants so much from your family.
We want your family to pay the right amount of inheritance tax: for want of a less hackneyed phrase, he who fails to plan, plans to fail, therefore we start the fulfilment of your duty to your family to keep as much of your life’s work in your family with a plan.
We’ll work out your IHT liability and we’ll lay out the steps required to help keep your money in your family.
How the rich remain rich
On implementation of your plan, we’ll have helped you bring life to your answer to your answer to the question at the top of this page: how many times would you like your family to pay inheritance tax on your estate?’.
You probably said: ‘at most once ideally never’. Let’s make it never.
That’ after all, is how the rich remain rich.
Frequently Asked Questions
What is inheritance tax?
When someone dies, the assets the newly dead person held in their name at the moment of death would be totted up. It is on this totting up that any liability to inheritance tax would be calculated.
Inheritance tax is payable on estate values worth more than the sum of:
- the inheritance threshold, also called the nil rate band, NRB – currently £325,000, and
- all allowances and exemptions to which the estate is eligible.
The standard rate is of the tax 40%.
The nil rate band (NRB)
The amount that you are allowed away before inheritance tax becomes a bother. The amount is currently £325,000.
The residential nil rate band
Further, most people may claim the residential nil rate band, RNRB.
The RNRB, currently worth £175,000, is available to people who hold residential property, and pass the residential property* to their children or further descendants. Your parents’ estates would qualify for the RNRB.The RNRB was introduced with the express purpose being able to render the phrase: you can leave your million-pound house to your children and pay no inheritance tax.
*In fact the building need not be passed down, the value of the building is what’s inherited.
The spousal exemption
The logical extension of the principle of consortium – the legal right to the affection, company and help of a spouse. All gifts between spouses are exempt from inheritance tax.
It’s all very well leaving gifts to your spouse, although such gifts have their place – much such gifting implies your spouse is immortal, the basis of estate planning is the beneficiaries would in their turn die.
What is the estate?
A person’s estate is every object, or contract that was in the name of the deceased, these include:
- The deceased’s principal private residence,
- other land and buildings,
- cash, shares and similar assets,
- pensions
- life insurance
- business interests
- things you’ve given away in the last seven years
The mathmatical jiujitsu of IHT
- I own a half million-pound farmhouse, my estate planning business is worth £600,000, I have £100,000 in the bank after spending £650,000 on my dream car, the Mercedes-Benz 350SL and I have a £250,000 bond.
- My next-door neighbour’s only asset is BTL portfolio worth £2.100,00.
- My sister is widowed, she owns half of the million-pound property in which she lives, she is the sole beneficiary of the £900,000 interest-in-possession trust from her husband’s estate, she has £100,000 Rolex, she pays her grandchildren’s school fees, she has a quarter million pounds in cash and a quarter million-pound interest in her daughter’s dentistry business, and she has £100,000 of shares in her god-daughter’s architecture practice.
All three of us have estates of £2.1m but, our taxable estates are respectively:
- £1,098,000;
- £1,725,000 and
- £8000,000
How to find the cash to pay the IHT bill?
As the you must pay the inheritance due before the courts issue the grant of probate, it is the executors’ to find the cash.
As executors you may:
- use the deceased’s cash
- use your own cash
- take a personal loan
Keep your money in your family
Get your free copy of the No-nonsense Guide to Keeping Your Money in Your Family: you’ll also get witty and informative articles and essays on keeping your money in your family. It’s packed with illustrations you can understand and relate to.