Comments can be summarised as: “Why should I pay taxes throughout my life and then be taxed again on the assets I’ve built up when I’m dead?”. This, of course, is an understandable point of view. However, if you feel this way too or you are interested in understanding more about Inheritance Tax, you should read on.
Please note, this article is mainly focused on individuals who are already UK domiciles.
- Inheritance Tax is complicated It is usually levied at 40%. However, this can be reduced to 36% if you gift 10% of your estate to charity. You have two Inheritance Tax free ‘Nil Rate Bands’. Firstly, an individual has a £325,000 Nil Rate Band which everyone is eligible for, although this can temporarily be lost. In addition, a further £175,000 ‘Residence Nil Rate Band’ (RNRB) may apply if you own a main residence and gift this to a direct descendant. However, you can easily fall foul of the rules regarding RNRB and this tax band will begin to be tapered away once your estate is worth over £2 million.
- It’s a ‘voluntary’ tax – in some respects Your estate cannot get away without paying Her Majesty’s Revenue and Customs (HMRC) what is due. However, you can plan throughout your life to ensure that your wealth is not subject to Inheritance Tax when the certainty of death finally comes. For example, assume a widow’s estate liable to Inheritance Tax is £2.5 million (after all reliefs and Nil Rate Bands are deducted). In this simple example, the Inheritance Tax due would be a substantial sum of up to £1 million. However, with prior Inheritance Tax planning, it would have been possible to save the estate the entire £1 million.
- UK domiciled individuals must pay Inheritance Tax on their worldwide assets You may also be subject to taxes in other countries on some or all your assets. If so, a double taxation agreement may be in place to ensure you are not fully taxed twice on the same asset. To understand more about the concept of domicile, read our article.
- Your spouse/civil partner is your best friend This is hopefully true when it comes to life in general, however, it is certainly true when it comes to Inheritance Tax. This is due to the simple fact that any gifts or transfers to a spouse or civil partner, in life and death, are exempt from IHT. You can also inherit your spouse/civil partner’s unused Nil Rate Band and Residence Nil Rate Band.
- Non-exempt gifts take seven years to leave your estate for Inheritance Tax purposes Any non-exempt gifts made in the last seven years will need to be included in your executor’s Inheritance Tax calculations and subsequent payments. You should note that this may even be 14 years in some situations. Your loved ones may need to pay Inheritance Tax themselves on gifts you made to them in the last seven years. This is even the case if they have already spent the money or tied it up in property – creating a difficult situation for them.
- You can make tax-free gifts The most well-known way to do this is to gift money to charity (or a political party if you so wish!). However, you can also make small tax-free gifts every tax year and during one-off events such as weddings.
- Some UK business and agricultural assets are partly or fully outside the remit of Inheritance Tax as long as they have been held for at least two years This includes shares in some AIM-listed companies which can attract Business Relief (BR), which can make them very efficient investments for Inheritance Tax planning. For example, you purchase shares in a BR-qualifying investment and hold these for two years. When you pass away, these shares (assuming they’re still BR-qualifying) will be outside your estate for IHT, saving a potential fortune in Inheritance Tax!
UK Inheritance Tax is complicated – notoriously so. However, with proper planning and expert guidance, you can navigate this minefield successfully. If you would like to read more about UK Inheritance Tax, please download our guide.
If you are a non-UK resident and are interested in tax planning before entering the UK or before becoming UK domiciled please see our article: 10 considerations for pre-UK residency planning.