Our specialist solicitors at Lovedays Solicitors can advise you on how best to avoid or limit any future liability for inheritance tax. Lovedays Solicitors have been advising people on tax issues for over 100 years.
What is Inheritance Tax?
Inheritance tax is a tax on your property and belongings which is paid after you pass away. The tax is usually applicable when the value of your estate is above a certain threshold. The exact rates and thresholds can vary depending on where you live and are subject to change under government policies.
The primary purpose of IHT is to tax wealth transferred on death, and whilst initially designed to be a tax on the very wealthy, now impacts more and more ‘ordinary’ families.
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When do you pay Inheritance Tax?
Inheritance tax is paid before a Grant of Representation is granted and within 6 months of death (failing which interest is charged and penalties can be given) and therefore before the estate is released to the beneficiaries. This can mean that a large part of the estate does not pass to your loved ones but instead paid as tax.
The Importance of Inheritance Planning
IHT planning is imperative for those who wish to maximise the assets that they pass onto their loved ones when they pass, while also minimising the tax implications associated with the transfer of wealth. Proper inheritance tax planning can help ensure that your estate isn’t significantly eroded by impact of IHT providing you with the peace of mind that your loved ones won’t face any unexpected tax bills as part of IHT implications.
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The Role of Wills in Inheritance Planning
A Will plays an essential role in the inheritance planning process. They serve as a legally binding document that outlines how you wish your assets to be distributed following your passing. They can play a pivotal role in avoiding disputes over the estate as well as specify your wishes in terms of how you wish your funeral to be carried out.
It is vital to ensure that your Will is kept up to date in order to properly reflect any changes in personal circumstances or in the way you wish for your estate to be distributed.
The Role of Trusts in Inheritance Planning
Trusts can also play an important role in your inheritance planning. Trusts can be used to protect assets from creditors and lawsuits while also reducing the implications of IHT. When assets are placed into a trust they may not be considered as part of your estate when you pass, however this may vary depending on the type of trust and other local regulations (see our separate information on trusts).
The use of a trust may also speed up the probate process. Assets considered as part of a trust can typically bypass the probate process leading a more efficient and private distribution of your assets.
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Strategies for Reducing Inheritance Tax
There are many ways in which you may be able to reduce the impact of inheritance tax. Most of these are things which should be considered sooner rather than later. These can be things such as:
- Considering life insurance policies
- Making gifts
- Amending Wills to minimize tax.
- Business planning
- Considering whether a tax relief may apply.
There are considerations with all of these options and therefore we recommend that you book an appointment to come and see one of our specialist lawyers. They will take some details of your finances and consider whether you have to pay inheritance tax in the first place. They will also be able to advise you on potential options moving forward to reduce or limit the tax bill.
The tax legislation is constantly changing and therefore if you have previously considered your inheritance tax position it may be wise to review it to ensure that you are in the best position going forward.
Gifting & Inheritance Tax
Gifts given within 7 years before death can potentially be taxed. The tax rate applied to these gifts can decrease over these 7 years depending on the value of the gift, a system referred to as 'taper relief'.
Some gifts are exempt from IHT, however, for example, gifts given to spouses and civil partners or gifts to charities.
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Life Insurance Policies & Inheritance Tax
It is important to understand the role that life insurance policies play in estate planning and how they’re treated in regard to inheritance tax. Many people opt to write their life insurance policies into a trust, which means the proceeds of the policy are not considered part of your estate when you pass away.
If the payout from a life insurance policy is written into a trust the proceeds from the trust will go directly to the beneficiaries named in the trust.
Business Planning & Inheritance Tax
It is also important to consider planning how your business assets will be passed on in order to reduce the impact of inheritance tax. There are a number of considerations to be made about your business in regard to IHT:
- Business Property Relief (BPR) – BPR can provide a significant amount of relief from inheritance tax, either 50% or 100%. To qualify for BPR, the business assets must have been owned for at least 2 years before the owner passes away.
- Agricultural Property Relief (APR) – APR is similar to BPR but is specifically relevant for farmland, woodland, and other associated business assets provide either 50% or 100% relief from IHT. APR is available when agricultural property has been owned and occupied for agricultural purposes for two years if directly owned and occupied by the owner or for seven years if rented out.
- Business Continuation – If an owner of a business passes away and the business continues its operations, IHT can be paid in instalments over a period of ten years. However, interest may be charged on the unpaid tax.
- Trading & Investment – BPR is available for trading businesses but not for those who operate on investments. Therefore, it is important to ensure that your business predominantly operates in trading (more than 50% of its activities) if you wish to claim BPR.
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What is the Nil Rate Band?
The Nil Rate Band is an allowance where no tax is payable. This is presently £325,000 per person. This does change from time to time so please contact us for the most up to date advice.
Sometimes it is possible to transfer the nil rate band, for example to your spouse. This can be a useful inheritance tax reduction tool.
The Residence Nil-Rate Band
There is also the main residence nil rate band which was introduced in 2017 which is valid on the main residence when it is given to a direct descendant. Please contact us for further details and the amounts of relief.
The Role of Solicitors in Inheritance Tax Planning
The expertise of legal professionals during inheritance tax planning can help you pass on the as much of your estate to your loved ones as possible. A solicitor can help you to draft wills, set up trusts, provide advice on potential IHT liabilities, utilise applicable reliefs, and more!
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