Inheritance Tax (IHT)
IHT is mainly charged on death. Your total wealth plus all gifts made in the previous seven years is taxable. This total is reduced by a nil rate band (NRB). If your spouse has predeceased you may have their NRB as well. Depending on the size of your estate, and the terms of your will, your estate may also benefit from an extra residence nil rate band.
You do not have to be an Entrepreneur to use Business Property Relief (BPR). Portfolios of AIM shares can qualify for BPR and so escape IHT – once held for two years. Independent financial advice is essential to make sure this is the right decision for you.
It’s well known that lifetime gifting saves significant amounts of IHT, but you must also consider the associated loss of income. Trying to give away an asset but still keep its income is usually ineffective.
Some Lifetime gifts trigger immediate IHT charges. Lifetime gifts to trusts, to close companies, or other non qualifying groups are all taxable, but only if they exceed your nil rate band.
Most other gifts of cash to individuals are Potentially Exempt Transfers (PET). These only count for IHT if you die within 7 years of making the gift. If you survive for longer the gift is ignored. Annual exemptions and other reliefs protect many lifetime gifts. Alternatively , WGFS may arrange insurance cover to protect your estate if that is suitable for you
Gifting assets is more complicated than giving cash. A lifetime direct gift to your family is potentially exempt for IHT, but you have to consider CGT – which is payable in lifetime. CGT is “cheaper” than IHT, and can be mitigated with the right planning advice.
Inheritance Tax Basics (IHT)
IHT is charged at 40% on your total wealth when you die. This includes all gifts made in the seven years before death. A £325,000 nil rate band (NRB) is taken off the taxable value. If your spouse has predeceased you and left everything to you, you can use their NRB as well. If your will leaves your home to your children or grandchildren then your estate may benefit from extra tax free slices called a property allowance The property allowance is not available for larger estates.
Lifetime gifts that are neither to individuals, nor to exempt bodies such as political parties or charities, are chargeable to IHT when made, at 20%. Thus, lifetime gifts to trusts, or to close companies, or to non charitable campaign groups are taxable, but only if they exceed your nil rate band.
Giving cash away does not count for CGT but the gift is a Potentially Exempt Transfer (PET). It will be counted in your estate for IHT if you die within 7 years of making the gift. If you survive for longer the gift is ignored.. There are annual exemptions and other allowances which can shelter lifetime gifts.
If IHT could be due on a significant gift then you may consider talking to WGFS to arrange insurance cover to protect your estate
Alternatively, if you can prove your gifts came out of spare income then they do not count at all for IHT. It is worth seeking advice to see if this can work for you.
Passing family wealth to younger generations
The most important IHT reliefs are Business Property Relief BPR and Agricultural Property Relief APR. If all conditions are met then assets qualifying for these reliefs do not count for IHT. You don’t have to be an Entrepreneur to qualify for these reliefs –portfolios of AIM shares can qualify for BPR and reduce the size of your chargeable estate – once held for two years. These can be risky assets to hold so independent financial advice is essential. WGFS can help identify if these investments are suitable for you.
It’s well known that giving away wealth in your lifetime saves significant amounts of IHT but lifetime gifts of assets also require you to consider CGT – which is payable in lifetime. CGT is the “cheaper” tax and can be mitigated with the right planning advice.
If you want to give away part of an investment portfolio or a rental property to your family in your lifetime this will be potentially exempt for IHT and so appear cost free, but without advice this can create a significant capital gains tax CGT exposure Trusts can be useful to step around this problem, as there are CGT reliefs available. Gifts into a trust are immediately chargeable to IHT – but if the value of the gift is less than your nil rate band then the IHT will be nil.
There are longer term tax implications to consider but holding assets in trust can be a crucial part of long term strategy, enabling the older generation to control the future direction of a family’s wealth and securing significant asset protection from other future risks. We work alongside your lawyers to make sure that the trust’s terms suit your wishes.