IHT Tax Free Allowances
With Inheritance Tax carving out a whopping 40% of your taxable estate, it may be reassuring to know that there are certain tax reliefs that you can utilise to bring down your Inheritance Tax bill.
What can you do during your lifetime?
It is a common misconception that if you gift money, that that lump sum is now outside of your taxable estate. There are however only certain circumstances where this is the case.
- Are you giving a cash gift in anticipation of marriage? If so, you can up to a maximum of £5,000 before the big day, depending on your relationship to the happy couple.
- Are you giving small gifts of up to £250? If so, as long as it is a single gift of £250 per person per year, these will also be free from Inheritance Tax.
- Did you know that every year, you can automatically make a gift of £3,000 under your annual gift allowance? If you do not use this allowance, it can be backdated by one year which would allow for a gift allowance of up to £6,000 the following year.
- If you were feeling extremely generous and wanted to gift more substantial assets, you still can, however the 7-year gifting rules will apply.
This means that this gift still forms part of your estate liable to Inheritance Tax until 7 years has passed from the date of your gift. However, after 3 years has passed, the amount of Inheritance Tax payable on the gift will start to reduce each year.
- When creating your Will, should you choose to leave 10% of your estate to charity, this will reduce any IHT due from 40% to 36%.
- If you find yourself in the fortunate position of having excess income, you may also be able to give gifts out of surplus income.
There are however strict rules about when this can apply i.e. the gifts out of your income must be regular, so they become part of your normal expenditure. Also these gifts must not reduce your usual standard of living.
To use a working example, paying your children’s rent each month could be accepted, however paying their rent 2 months out of the year to help them out would not count as your normal expenditure.
What can we do to help your executors?
Executors are responsible for ensuring that Inheritance Tax is correctly paid, and they are personally liable for this if they make an error. Please see our previous post https://willsandtrustssolicitors.com/personal-representative-liabilities/ for an explanation of the personal liabilities faced regarding Inheritance Tax and administering a deceased’s estate.
It’s not surprising that many executors come WT Solicitors for support during this difficult time. There are several ways that our Solicitors can help to reduce your tax bill, where appropriate.
- Action a thorough review of your lifetime gifting to make sure that all potential reliefs are logged with HMRC.
- Business and agricultural reliefs may also apply, and we will review your assets to check for business of farmland ownership.
- The most substantial exemptions that apply are set by the Government. Currently, every individual in the UK has tax free nil rate band (NRB) of £325,000. This means that the first £325k of your estate is automatically tax free. If your estate is over the NRB amount but is being left to your spouse/civil partner or to charity, then we will advise HMRC of this to ensure that your estate becomes tax free. If your estate is under £325k, any unused amount can be transferred to your spouse/civil partner for them to utilise for their own estate.
- If you own a home that you leave to your children, an additional residential nil rate band of £175,000 tax free allowance can also be utilised.
WT Solicitors will happily provide your executors with support that could be invaluable when reducing that could be payable if the reliefs and exemptions are not properly utilised. Get in touch with us today by calling 01844 899150 if you would like support with planning for or administering an estate.
