HMRC inheritance tax documents

Five tips to reduce your estate’s inheritance tax bill

Recent statistics show that HMRC collected £5.1 billion in inheritance tax (IHT) in the period from June 2016 to May 2017, a 9% rise on the previous year’s receipts. Much of this record take must be attributable to the fact that the IHT nil rate band (the amount that can be left without any charge to IHT) has been frozen at £325,000 since 2009 while asset values have continued to rise. We set out a few tips on how to reduce your contribution to these record receipts:

  1. If you have excess income not needed to maintain your normal standard of living then consider making regular gifts out of income to your intended beneficiaries. Such gifts are completely IHT free however long you survive them. It is important that the gifts are made regularly and that you record your intentions in respect of future gifts. If your children are still young then the gifts can be made to a trust and a decision about when and whether they benefit can be made in due course.
  2. The IHT regime contains a number of valuable exemptions and reliefs but in many cases the rules governing these reliefs can be complicated. For example, if you are a small company owner you should benefit from business property relief after two years of ownership but the availability of this relief can be compromised if, among other things, your company owns investment property or holds excessive cash reserves. If you own business or agricultural property, it is therefore worth reviewing the structure of your business to ensure that maximum reliefs will be due to your estate.
  3. The newest IHT relief is the residence nil rate band (RNRB) which, in this tax year, exempts £100,000 of your estate from tax if you leave a residential property to your children, grandchildren or their spouses. The relief tapers away on estates that exceed £2 million until it is worth nothing if your estate exceeds £2.2 million in 2017/18. The RNRB is a complicated relief and it is worth reviewing your Will to ensure that you qualify. In calculating the £2 million limit, assets that might be free of IHT, such as business property, are included. Action can be taken to reduce the impact of this by drawing up Wills in a way that ensures the estate of the survivor of a couple is minimised for tax purposes and the amount of the RNRB is thus maximised.
  4. One way of reducing the normal 40% IHT charge on your estate is by leaving 10% of your net estate to charity. This reduces the IHT rate applicable to your estate by 4% to 36%. If your current Will includes charitable gifts that fall short of a 10% legacy, increasing the charitable legacies to 10% can actually have the side effect of also increasing the amounts due to the non-charitable beneficiaries.
  5. If you are entitled to a death in service benefit under your pension then it is worth considering nominating this to a discretionary trust set up during your lifetime. The amount due can be fairly substantial and placing this sum into a trust ensures that the sum paid does not fall into your spouse’s estate and become subject to IHT on their death. Your spouse can, however, be a beneficiary of the trust and receive income and/or capital from it at the trustees’ discretion. At the same time it is worth writing any life insurance policies in trust so that they do not form part of your taxable estate and the proceeds can be obtained quickly and easily without having to await the issue of a grant of probate to your estate.

If you would like further information on any of the above tips or to discuss estate planning with us then please do not hesitate to get in touch.