Time to review your inheritance tax planning

The end of the tax year is nearly here, and what better time to review your inheritance tax planning says Peter Gosling, partner at law firm Higgs & Sons

Time to review your inheritance tax planning

The end of March signals the end of the tax year, an excellent opportunity to review long term financial and wealth planning, particularly inheritance tax

There have been a number of changes in areas such as inheritance tax over recent years, and many families are still unnecessarily caught by inheritance tax. Even those who have fairly moderate wealth and have savings and pensions or own property could benefit from reviewing their financial situation.

The ordinary nil rate band (NRB) for 2015-16 is £325,000 and will be frozen at this level until 2020-21. However, George Osborne introduced new rules for the passing of the family home in last year’s Summer Budget.

This has created a new residence nil rate band available in respect of a property which at some point has been the deceased’s main residence. This will be £100,000 for deaths after 5 April 2017, rising to £175,000 after 5 April 2020. If unused, it will also be transferable to the deceased’s spouse or civil partner, making total Inheritance Tax (IHT) exemptions of £1m for a couple from 6 April 2020, although estates over £2.2m will receive no benefit from the new rules. Inheritance tax is then payable at 40% on the estate over the available allowances.

The mitigation of IHT is best thought of as a ‘process’ rather than an ‘event’, with the best results typically being achieved by taking a series of smaller steps over a number of years.

At the end of each tax year you should consider using available allowances, exemptions and reliefs to help mitigate your tax liability:

GIFTING – you should consider gifting assets during your lifetime to minimise the IHT payable on your death. Such gifts will fall outside the IHT net after seven years provided you do not reserve a benefit in the asset transferred.

ALLOWANCES – make use of other IHT reliefs and exemptions, such as the annual gifts exemption of £3,000 (£6,000 if no gifts were made during 2014-15), the small gifts allowance of £250 per donee and gifts made in consideration of marriage (£5,000 to children, £2,500 to grandchildren, and £1,000 to anyone else).

SURPLUS INCOME – if you have income surplus to your normal living expenses, consider making use of the IHT exemption for gifts out of income. Such gifts are tax-free, even where death occurs within seven years.

VARIATIONS – if a family member has died within the past two years check whether a deed of variation could reduce any IHT liability arising in respect of their estate, or be used to redirect the assets to where they are most needed.

Though we may not want to think about it too much, it is important to consider what will happen to your hard earned wealth after you are gone.

It is never too early to look at how your family’s inheritance can be protected from excessive tax demands, and a carefully drafted will is the best, most effective way of doing just that.

 

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