Inheritance Tax: protecting your family’s assets

With a new Government potentially heralding changes to inheritance tax, make sure to understand your family’s position and the options available to you now. Regularly reviewing and updating your Will as circumstances and tax rules change is prudent. Ensuring that your Will fully considers charitable gifts, any ISA investments, the family home and your pensions is advisable. 

What is the inheritance tax threshold?

Under normal circumstances, the threshold for inheritance tax (IHT) in the UK is £325,000. This means that if your estate is valued under £325,000, there will be no IHT to pay.  

If you give your family home to your children, stepchildren or grandchildren, your threshold can increase to £500,000.

If your estate is worth less than £325,000 when you die, any unused amount up to the threshold can be added to your surviving partner’s threshold.

Who pays inheritance tax on gifts?

Under current rules, gifting an asset to another individual is often potentially exempt from IHT. If the donor survives for seven years from the date of the gift, it falls out of their IHT estate. However, if the donor does die in this period, the value of the assets gifted at the time the gift was made could become taxable. 

An important factor to remember is that when an individual makes a gift, it is the current market value of the asset being gifted that is taken into account for IHT purposes. 
 
If a gift fails the seven-year rule, subject to reliefs and exceeds the IHT nil rate band (currently £325,000), IHT could be payable on the gift (by the recipient or the executors). Clearly, making a gift when asset values are low will mitigate the potential IHT exposure for the individual considering gifting an asset.

Trusts and inheritance tax

The creation of a trust to hold assets for the benefit of the wider family or dependants has been a long-standing solution for many individuals seeking to pass assets to the next generation. 
 
Settling a trust is generally a chargeable IHT event, however, if the settlor’s nil rate band is fully available, individuals can transfer £325,000 of assets into the trust without incurring an IHT liability. This could increase to £650,000 for married couples jointly settling a trust with the availability of two nil rate bands. 
 
Capital gains tax hold-over relief may be available so that the gift to the trust does not trigger a CGT liability. However, when the asset is sold, the trustees will have a reduced base cost and the gain will be liable to CGT at the rate prevailing at that time, which may be higher than the current rates. 

If you are considering settling a trust or have already established one, now may be a good time to gift or sell assets to the trust.  
 
When assets pass out of the trust to a beneficiary, either by way of an entitlement or an appointment by the trustees, any IHT and capital gains tax (CGT) liabilities are based on the current market value of the assets passing and taxed at current rates. Trustees may wish to consider whether the trust continues to meet its objectives and whether it is now appropriate to appoint assets to their beneficiaries. 

Inheritance tax and charitable gifts

Gifting to a charity is exempt from IHT, however, the charity must be a UK registered charity or CASC in order to qualify for any tax relief – Income Tax, Capital Gains Tax & Inheritance Tax.  

Gifts to non-UK charities are no longer exempt and will therefore be chargeable lifetime transfers and may be subject to an immediate IHT charge (they do not qualify to be a potentially exempt transfer). However, in many cases it may be possible for donors to continue to support causes in EU/EEA countries, or worldwide, this could be either through a “UK Friends of” charity or other UK charitable vehicle.

Inheritance tax on pensions

Currently, residual pensions savings can be passed on free of inheritance tax to any beneficiary in accordance with a deceased’s letter of wishes/nomination form. However, if a person makes a deliberate decision to not draw their pension so it can pass on death to their beneficiaries, the IHT exemption might be denied.
The recent abolition of the Lifetime Allowance (LTA) may lead to changes in widely used pension withdrawal strategies. An individual whose pension pot was previously above the LTA of £1,073,100 (and with no protection/enhanced protection) might choose to crystallise pension benefits now that the LTA tax charge has been removed.

There are many financial, investment and IHT issues to carefully consider before proceeding but acting on your pension now may save tax in the long term. However, action should only be considered as part of overall wealth planning including advice from independent financial adviser. Read more on the pension tax changes here.

Protecting your family's future

Our team of experts can help you face the current financial challenges and advise you on your options for protecting your family finances and assets for the long term. Doing the right thing for your family now will put your mind at rest and help you protect them in the future.

SPEAK TO THE TEAM