Inheritance Tax (IHT) is charged on anyone’s Estate after death – except if you’re leaving everything to your spouse/civil partner, UK charities or political parties. But if you’re child free you may have other members of your family who you want to leave your Estate to. Steve Wright, our Estates Director, explores what steps you can take to reduce your IHT bill in this situation.
IHT is one of the most aggressive in the UK tax system. Charged at a flat rate of 40% it can effectively wipe out much of your estate for your beneficiaries. Spouses and civil partners are exempt, and your direct descendants can benefit from a couple of useful allowances including the Residence Nil Rate Band which provides some leeway for property to be passed on. But if you’re leaving your Estate to siblings, nieces, nephews or cousins the same rules don’t apply. So what can you do if you’re planning to leave your Estate to members of your extended family?
Avoid doing nothing
It can be tempting to feel like you’re powerless in this situation, but the best course of action is usually to look at what you can take control of. Every person has an allowance which is free from IHT – the first £325,000 is protected from being charged at all. However, if your Estate is greater than this allowance everything you leave to your nieces and nephews will be impacted by the 40% charge. And this can make a real dent in your legacy. If you’re leaving an estate of £1M your heirs could face a staggering £270,000 IHT bill. Some simple steps can help though.
Gifting throughout your lifetime can be the best way to distribute your Estate and reduce the IHT bill for your nieces and nephews. You can gift up to £3,000 each year tax-free, so if you have access to capital this might be a way in which you can begin to chip away at the overall value of your Estate and bring down that bill. In the same example above, with an Estate valued at £1M, the IHT bill can be reduced by £12,000 to £258,000 if you gift £3,000 a year for the ten years before you die. You might also enjoy seeing them experience a small part of their inheritance during your lifetime. There are other ways to gift too including a tax-free gift on the occasion of their marriage. But one of the most powerful options is to make gifts out of your surplus income if you can afford to – these are exempt from IHT. All other lump sum payments to your heirs would be subject to IHT unless you survive for seven years or more after making them.
Use your property
If your Estate is tied up in property you may feel that you would prefer to downsize and release some of the funds for your heirs. Of course, you’d need to make sure you still have a home for yourself, and the funds with which to support your lifestyle too, but this can be a sensible way to pass on a proportion of inheritance during your lifetime. Again, be aware of the seven year rule here.
Unfortunately the UK tax system doesn’t provide the same advantages to those who are unmarried or child free. However this doesn’t mean there aren’t ways in which you can take control of your Estate planning. Looking ahead and giving yourself time to review your options can give you a greater chance to reduce your IHT bill for your nieces and nephews.