Inheritance Tax Planning
Inheritance Tax (IHT) is a tax paid on any property and belongings (your estate) you leave when you die. IHT must be paid before probate is granted and your inheritance is made available to your loved ones, but IHT can take a large portion of the wealth you leave behind.
For IHT purposes, your estate can include:
- Your home and any other property you own
- Any Bank or Building Society accounts
- Investments and ISAs
- Insurance policies not paid out under trust arrangements. Some debts can also be taken into account and reduce the overall value
We’ve seen many estates pay far more IHT than they need to, and MJR Solicitors can help you maximise the amount you leave behind. Our inheritance tax experts can complete a full review of your estate and give you expert advice on how we can help you reduce IHT on your estate, ensuring the liability is minimised as much as possible for you.
How we can help reduce the IHT on your estate
There are several ways we can help reduce the amount of inheritance tax paid, and one of the most effective and important things you can do is to write a will. If you haven’t thought about this yet, it’s not too late and our expert will and estate planning team can help you.
Our MJR Inheritance Tax Solicitors can give you all the expert advice you need to reduce your IHT, including how to:
- Make gifts to charities or political parties
- Start a Trust
- Amend your inheritance plans following a marriage, or a divorce
- Structure your affairs to benefit from available reliefs
- Make investments with favourable IHT treatment
- Add deeds of variation
Why do I have to pay inheritance tax (IHT)?
It’s a question everyone wants to know the answer to. The concept of IHT is that without it you have inherited wealth indefinitely. Like other taxes, IHT gets redistributed to the state for the benefit of everyone.
The argument against IHT is that when money’s earned, tax is paid at the time, so to pay tax on it again isn't really fair. You’ve worked hard all your life and paid both income and capital gains tax, yet when you die, the government take 40% of the value of your estate over your personal allowance.
How much inheritance tax (IHT) do I pay?
In theory, your estate will pay tax at 40% on anything above the £325,000 inheritance tax threshold when you die (or 36% if you leave at least 10% to a charity). However, the way this works in practice isn’t so clear cut.
- The current allowance, whereby no IHT is charged, is on the first £325,000 (per person) of your estate. This is the value of the total assets you leave behind when you die. This remains unchanged. Above this threshold, the charge is 40%.
- A new, tax-free 'main residence' band was introduced in 2017, but it’s only valid on a main residence and where the recipient of a home is a direct descendant (children, step-children, and grandchildren). The band is being phased in gradually, starting at £100,000 from April 2017, rising by £25,000 each year until it reaches £175,000 in 2020.
- In 2017, the maximum that can be passed on tax-free is £850,000 for married couples or those in a civil partnership, £425,000 for others. For singles, this is made up of the existing £325,000, plus the extra £100,000. For couples, when the first partner dies, their allowance is passed to the survivor, so that £425,000 is doubled to £850,000.
- In 2020, the tax-free amount will rise to £1m for couples, £500,000 for singles, as the main residence allowance rises.
- Currently, without the 'main residence' additional allowance, couples can leave a home worth £650,000 without it attracting inheritance tax (singles £325,000).
- On properties worth £2 million or more, homeowners will lose £1 of the 'main residence' allowance for every £2 of value above £2m. So for a couple, properties worth £2,350,000 or more will get no additional allowance.
Am I exempt if I'm married?
Property transfers between married couples or civil partners don't attract IHT and your estate is exempt from IHT if you leave everything to your husband, wife or civil partner who lives permanently in the UK. Married couples and civil partners can give any value of gifts to each other during their lifetime without IHT being due on them.
This is known as ‘spouse or civil partner exemption’. However, there are some occasions when this band can be reduced. i.e if you pass to children on first death with the remainder to children, the nil-rate band which is transferrable is effectively eroded. Here’s an example:
Mr and Mrs Smith have assets worth £800,000 between them. Mr Smith dies first, and leaves £200,000 to their children. The remaining £125,000 of his nil-rate allowance will pass on to Mrs Smith, giving his wife an allowance of £450,000 (the % of unused is passed).
When Mrs Smith passes away with assets of £600,000, as Mr Smith didn’t use his full nil-rate allowance, she’d owe 40% on everything above £450,000, meaning £60,000 (40% of £150,000) will be payable in tax, leaving all the rest (£540,000) to their children.
What if I am not married?
If you're not married, but own assets jointly with another person, the situation gets complicated, especially where a residential property is involved. Your liability to pay IHT will depend on whether you and your partner own the property as 'joint tenants' or 'tenants in common' and whether there's a will.
If you're joint tenants (you both own all the property), and your partner's left you everything in the will, then if your partner's assets, including the property, exceed the £325,000 IHT threshold, you'd have to pay IHT on any assets in the estate above that. After your partner's death, your property would then be owned by you in its entirety.
Even if your partner didn't leave a will, thanks to something called the 'right of survivorship', the property would still go entirely to you, although the above inheritance tax rules would still apply. However, his or her family would still have a claim to your partner's share of other assets, such as insurance policies and pension investments.