Over the course of a lifetime, many people accumulate a portfolio of possessions and property that they hope to pass on to future generations. However, such estates are likely to be subject to substantial taxation that could prevent property being administered the way intended.
‘Inheritance tax planning’is what people do in order to legally minimise the amount of inheritance tax that will be chargeable to their estate when they pass away. At Lewis Nedas, our specialist tax lawyers provide advice and support to help clients negotiate what can be a very convoluted area of the law.
It is an unfortunate fact that property that is to be inherited will be subject to inheritance tax. Furthermore, it needs to be borne in mind that those who are to inherit will be liable to that tax: in inheriting the property, it falls to them to settle the tax bills.
The impact that inheritance tax will have depends on the value of the estate at the owner’s death. The rates of inheritance tax tend to change from time to time.
For the 2015/16 tax year, if an estate is valued below £325,000 then no inheritance tax will be due. This is called the ‘nil-rate’brand of inheritance tax. When all of the possessions and property forming part of an estate are valued, e.g. house, investments, cars etc, the ‘nil rate’band can be exhausted very easily. Where an estate exceeds the £325,000 limit, it will be liable to pay 40% in inheritance tax.
How to Reduce Inheritance Tax Liability
The only way to reduce the liability to pay inheritance tax on an estate, is for the estate itself to be reduced in value before its value needs to be calculated, i.e. when the owner passes away. There are a variety of different options that can be used to reduce the liability of an estate for inheritance tax:
- Use a Trust
A trust is a kind of partnership between three different people, where part of an estate, e.g. a sum of money, is passed from someone called a ‘settlor’, to another called a ‘trustee’who will hold the estate for the ‘beneficiaries’. These titles may sound strange, but are quite easy to understand:
- Settlor - the individual who creates the trust;
- Trustee - the person who will take ownership of the estate when the settlor dies;
- Beneficiaries - these are the people who will benefit from the estate which is being held in trust.
There are different kinds of trusts that can be created: it will depend on the intentions of the prospective settlor, and what they want a trust to do, e.g. set money aside for grandchildren to use in higher education or making a more structured financial plan to benefit family members in the future.
The important point is that, depending on the kind that is being used, and depending on when they are created, they can reduce the inheritance tax that needs to be paid by an estate.
- Use Tax Allowances
The law reflects the reality that people may give their partners or spouses some of their estate, e.g. property, during the course of their life together. Any such property may be exempt from any inheritance tax.
There is also an important allowance for married couples in terms of the ‘nil-rate band’. If one half of a couple (married or civil partners) dies, and the value of their estate is less than £325,000, then the estate will not be taxable. Furthermore, whatever portion of the ‘nil-rate band’remains can be passed on to the surviving partner or spouse for them to use at a later date.
- Give a Gift
Giving something as a gift during a person’s lifetime is another very useful way of reducing inheritance tax vulnerability.
Something will only be counted as a gift if the person giving it no longer enjoys any benefit from it, i.e. they are no longer able to make use of it. People may have amassed a collection of items over the course of their life, e.g. antiques, jewellery etc., that they would hope to pass to other members of their family. If this is done before they pass away, while they will no longer be able to enjoy it, it will not be counted for inheritance tax purposes.
It is also not uncommon for people to leave gifts to charities. Unlike gifts given to members of one’s family, a gift to a charity on death will be not be included in calculating an estate’s inheritance tax liability.
Furthermore, some people may have relatives that they have been caring for. They may hope to leave some finances behind to accommodate their relatives’needs when they are no longer alive, which will also not be counted for inheritance tax.
There are in fact a variety of different legal methods that can be used to plan and reduce an estate’s inheritance tax liability. The utility of each of the respective options will ultimately depend on the particular circumstances: what do you want to do with your property when you pass away, and who do you want to leave it to?
Contact our Inheritance Tax Planning Solicitors in London
At Lewis Nedas, our specialist tax solicitors are regularly involved in helping clients organise their estate, to reduce its liability to pay inheritance tax. We provide a service that offers legal advice reflecting your needs. Our team understand have vast experience navigating the complex and changeable legal framework concerning tax. We will work with you to make sure you understand how the tax laws will impact you, and discuss the options that would suit your own particular circumstances. If you have any questions regarding estate planning or inheritance tax issues, please contact us.