As I lay one Saturday morning enjoying a lie-in I listened to Radio 4. I was puzzled why the light magazine programme had mentioned Inheritance Tax. After pondering this and trying to reconcile it with the speaking which followed it just did not make sense. Eventually I decided to go for broke and ask my wife Felicity what it was about. She took delight in telling me the subject was ‘Inheritance Tracks’ where certain old music tracks were discussed and played. I could return to my slumber with an eased mind.
While Inheritance Tax is always in my mind as I help clients, sadly that cannot be said of most people. What this means is that they bumble along missing opportunities to give more money to their children on death.
It used to be said that Inheritance Tax was a voluntary tax in that with enough planning most people could avoid paying it. In particular the very richest people paid the least Inheritance Tax (IHT).
Nowadays given the value of houses I think the tax is harder to avoid, and so should not be regarded as voluntary. Having said that what is sad is when people miss simple opportunities to reduce the tax bill should they die.
A few figures first. If you die and don’t have a living spouse then IHT will hit your estate if you are worth over £325,000 (2011/12 figure). (If you were married and your spouse died without using all their IHT exemption then you could have up to 100% extra, at the new rates.)
The tax will be at 40% on whatever value is over that limit. Certain business assets may be excluded from the tax or may have only 50% of their value taxed.
If you have a spouse and leave money and/or assets to them then those transfers are not counted for IHT purposes. You would then only have a tax bill on your death if your bequests other than to your spouse exceed £325,000. If all your estate is passed to your spouse then you will not have used any of your nil rate band. Under current legislation (2011/12) whatever percentage of your nil rate band which is unused will be available to your spouse. So if 100% is not used then when your spouse dies (if the law remains the same) they will get a double allowance (£650,000 at 2011/12 rates).
This spouse transfer thing is therefore quite useful, but the following needs to be borne in mind:
- Nobody knows which spouse will die first.
- Nobody knows if the double allowance thing will still be around when your spouse dies.
- The second death could come soon after the first, meaning no tax planning time for the survivor. So if you have strong feelings about the final destination of your assets you may need to set them out in your will.
Far more important than saving tax is that your surviving spouse has enough money to be comfortable. They have to live the rest of their days, and should not be short of money because you wanted less tax paid when you are both gone.
Single or cohabiting people face a bigger challenge. They have no spouse for transferring assets so the chance of an IHT bill is much bigger.
For such people the best advice is plan early, live long, and make gifts during your lifetime. So instead of leaving all you have to nephews and nieces in your will, give them some of it now.
If you live 7 years from the gift then that amount is completely disregarded when your IHT is worked out. Contrary to popular belief there is no limit on how much you can give away now. The only issue is that if you die within 7 years then some or all of that gift will be added on when your estate is valued.
Keep one eye to Capital Gains Tax (CGT) if during your lifetime you give away an investment property or holiday home. This will be taxed under CGT as if you sold it at market value. You might have received no money for it and still end up with a CGT bill!
Don’t dig your head in the sand about IHT. Make a tax-efficient will. Make some lifetime gifts. Plan for the tax.
The longer you live and the more you do then the less the government will snatch from your estate.
Facing a 40% tax charge on your estate over the nil rate band should be enough to encourage everyone to take professional advice.