Inheritance Tax: The importance of Wills, planning for Care and equity release

22/03/2021

A growing proportion of the UK population are finding that their estates are above the inheritance tax (IHT) threshold, meaning that HM Revenue & Customs (HMRC) are collecting an increasing amount in IHT each year.

When an individual dies, the Government then assesses the value of their assets (less any debts), to calculate the amount of IHT that is owed.

IHT is levied at a rate of 40% of all estates valued at £325,000 or more. This £325,000 threshold is known as the ‘nil-rate band’ (NRB) and, despite ever-rising wealth across the country, has remained frozen at this amount for several years.

The Chancellor, Rishi Sunak, announced in the Budget 2021 that this will remain frozen at the current level until 2026.

As the threshold has now been static for a number of years, coupled with the rising cost of houses and the natural rise in inflation over the years, more and more people are now hitting the NRB threshold and becoming liable for IHT when passing on their assets to their loved ones.

However, through careful planning, it is possible to take actions that, over several years, can have a substantial effect on how much of your wealth you can pass on.

Planning is key

Planning is key. While nobody particularly wants to consider later life planning, ensuring that provisions are in place to protect you and your loved ones in the most tax-efficient manner is essential. There are several reliefs, allowances and opportunities available to you to help you mitigate your IHT risk.

If you are a married couple or in a civil partnership, you can pass your possessions to each other tax-free upon death, while the remaining tax-free allowance of the first partner is passed to the surviving partner.

Our expert team at WMT is on hand to help you reduce IHT with specialist advice and careful planning. Some considerations to make include;

• When making gifts, we can check if they are tax-free, potentially exempt transfers (PETs), or taxable gifts. There is a chance tax will be due if the value of your gifts amounts to over £3,000 in a year and they were made in the last 7 years before the end of life
• Spend or give away part of your wealth during your lifetime, making sure you leave enough money for yourself to live comfortably
• Take out a life insurance policy under trust, as the payout doesn’t count towards your estate and may be big enough to cover the IHT bill
• Make the most of your will to ensure those you want to inherit do so. Consider adding a deed of variation to your will, so your beneficiaries may redirect part of the inheritance to someone else, with their mutual agreement
• Establish suitable Trusts to shelter assets from IHT liabilities and ensure tax-efficient passing on to beneficiaries eventually

You should also be aware of how the residence nil-rate band could benefit you. This applies to individuals who have direct descendants with an estate, including a main residence that exceeds the £325,000 nil-rate band.

If you’re gifting your home to children or grandchildren, you could qualify for the residence nil-rate band, meaning that you’ll gain an additional threshold before IHT becomes due on your estate, which is £175,000 in 2020/21.

From 2021/22 onwards, the threshold will increase in line with the Consumer Price Index (CPI). This amount is then added to the standard nil-rate band, so in this case, would be £500,000.

If you have any income from employment, investments, pensions, shares or a second property, then you can regularly gift any surplus, post-tax income that is exempt from your estate for the purposes of IHT.

This is advantageous as you can gift as much as you like, providing that you retain enough income to cover your usual cost of living and any expenditure, while also establishing a regular pattern of gifting to ensure that it qualifies for the tax relief.

During your lifetime or on death charitable gifts are also IHT-free. The 40 per cent rate of inheritance tax is reduced to 36 per cent as long as you leave at least 10 per cent of your estate to charity, which includes charities, museums, universities and community amateur sports clubs.

What about trusts?

Trusts are a way of managing your assets so that you can remain in charge of their distribution during your lifetime and beyond. Setting up a trust allows you to:

• Control and protectfamily assets;
• Provide an incomefor your beneficiaries; and
• Reduce inheritance tax

There are many considerations to take into account when planning with trusts. We help clients understand the options and opportunities this type of planning provides, so they can pass wealth to the next generation in a controlled way.

Estate planning & probate

Alongside IHT planning, our expert team can also help you get your financial records in order during your lifetime to ensure that the probate process is as smooth as possible for your loved ones after your death.

Our probate planning services include a combination of;

• Trust and estate planning;
• Retirement planning; and
• Business tax planning

We realise that the passing of a relative or a close friend is a difficult and upsetting time. Dealing with the administrative elements of their financial and legal affairs can create additional stress and pressure at a sensitive time – which is why our probate service can provide a hassle-free and efficient solution.

Our probate service, run by Paula Jeffs, an authorised probate adviser, offers a personal touch and can help guide you through the probate process. If you are an executor for the deceased’s estate, or you know someone who has been nominated to carry out this duty, we can help.

Our expert team are familiar with complex financial affairs, and, if the deceased was a client, then we will be particularly well-placed to ensure that probate proceeds smoothly.

At WMT we are licensed to provide probate and estate administration services and we can support you as much or as little as you need to administer probate. We can provide an estimate for the fees which are based on the amount of work required and the complexity of the estate.

For help and advice on Private Client matters, such as inheritance tax, Wills, trusts, estate planning and probate, contact Paula Jeffs, our Private Client Partner at WMT – Chartered Accountants today.