What is Inheritance Tax?
Inheritance Tax (IHT) is a tax applied to the value of an estate (property, cash, investments and possessions) on death. How much you pay depends on the value of the assets of the deceased’s estate minus testamentary expenses, debts and liabilities. IHT also extends to lifetime gifts, but there a number of ways in which you can plan during your lifetime to reduce the amount of IHT your estate will have to pay on your death.
What lifetime ‘gifts’ are not subject to Inheritance Tax?
Exempt ‘gifts’ include gifts:
- made between married couples or civil partners;
- made to charity;
- between £1,000 and £5,000 (depending on the nature of the relationship between the donor and donee) which are made in contemplation of marriage/civil partnership;
- within the annual allowance of £3,000 per tax year (per donor not donee);
- of up to £250 to any individual each tax year; and
- which are regular and made out of the donor’s income, which do not adversely affect the donor’s standard of living.
Can I avoid Inheritance Tax on my property by ‘gifting’ my house whilst I am still living there?
If the donor continues to benefit from the gifted asset, for example if a parent “gifted” their house to their children, but continued to live there, the donor would be treated as continuing to own that property for IHT purposes. Therefore, IHT would be chargeable on that property on the death of the donor, regardless of the time that has passed since the date of the gift. The value of the house at the date of death will be chargeable to IHT, not the value of the house when the gift was made.
There are some exceptions to this rule which may mean that IHT will not be chargeable, but this is a complex area of law, so specific advice should be taken on any arrangements which may allow a donor to continue to benefit from the “gift”.
Are Trusts helpful in IHT planning?
Trusts can be used as a vehicle to hold lifetime gifts without providing any individual with an absolute entitlement. They can help you preserve your assets for generations to come, whilst moving them outside your taxable estate and ensuring that they can be directed to those you wish to benefit, on terms that you are able to dictate.
Can you plan ahead to avoid paying Inheritance Tax?
- It is usually possible to take steps during a person’s lifetime to reduce the future IHT liability on their death.
- The scope in avoiding IHT, however, is limited.
- Any attempt to reduce IHT should be carefully considered as it could limit access to your funds should your need for those funds change or could incur other adverse tax consequences. Any IHT planning should be regularly reviewed to take into account changes in the law and your personal circumstances.
How can we help you?
Our Private Client team at Berry & Lamberts Solicitors will take the time to understand you and your family circumstances. They will consider your wishes and put together a plan for you to execute during your lifetime, with the aim of reducing the amount of inheritance tax that will become due on death. We have an experienced and skilled team that can advise you of your options and the associated risks, thereby enabling you to make fully informed decisions, thus avoiding unexpected surprises in the future.