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Passing On Wealth

Inheritance Tax Planning

The amount we can pass on to our family or other beneficiaries (the Nil Rate Band), has not increased since 2009/10 and will remain at £325,000 until the end of 2020/21. A new relief is being introduced, the ‘Main Residence Nil-Rate Band’, which will be available for anyone who passes on their property to a direct descendant. This will be for an additional £100,000 from 2017/18, rising to £175,000 in 2020/21. This will only be available for properties worth £2,350,000 or less. There are many potential inheritance tax planning opportunities which clients could take advantage of to mitigate for this tax.

Use IHT exemptions

The starting point for anyone who is wishing to carry out inheritance tax (IHT) planning is to use their exemptions. There are a number of IHT exemptions available and where possible clients should consider making maximum use of these.

The most common ones being:

  • Annual exemption – each individual can give away £3,000 each year, and use the previous year’s exemption if not already used.
  • Small gifts exemption – up to £250 can be given to any number of individuals (note this exemption cannot be combined with any other exemption in favour of the same person)
  • Normal expenditure out of income – gifts can be made out of surplus income provided the gift does not affect the donors’ usual standard of living.

Exemptions also apply to gifts on the occasion of a marriage and gifts to charities and community amateur sports clubs.

Planning in this area is often overlooked or ignored with few clients using such exemptions to the full potential. Over time regular use of these exemptions can result in significant IHT savings. Take the example of someone who has made use of their annual exemption over say 20 years – £60,000 would have been gifted free of IHT, saving £24,000 in tax!

Making larger gifts during your lifetime

In some cases it may be possible for you to make other lifetime gifts, whether outright to another individual or by executing a trust.

The current regime for outright gifts is favourable, thereby providing scope for lifetime planning. Gifts are normally ‘potentially exempt transfers’ (PETs) for IHT, meaning that no lifetime tax is payable on the gifted amount, or on any increase in value if the donor survives for the required seven-year period. Also, there is no limitation on such gifts or on the amounts which can be gifted. So provided the person making the gift is in reasonable health and is happy to make such gifts, substantial IHT savings can be made. The same IHT treatment also applies where the client wishes to execute a bare (absolute) trust, which in turn will also fall out of account provided the settlor survives seven years from the date the trust is created.

Outright gifts to another individual/bare trust, provides for the more simplistic type o