HMRC inheritance tax documents

Inheritance tax planning for individuals without children

When we think about inheritance tax (IHT) planning it is often in the context of parents  passing on family assets to their children in a tax efficient manner. However, IHT is not just an issue for those with children.  We look at three situations where individuals without children can use IHT planning to ensure that their estate assets are maximised and tax charges minimised.

Individuals who wish to benefit charity

If someone leaves gifts to charity in their Will equivalent to at least 10% of their taxable estate, they benefit from a reduced IHT rate of 36% (compared to the usual 40%). Gifts in Wills can be drafted so, that, on death, the correct amount is given to charity to qualify for this relief, notwithstanding any fluctuations in the estate’s value that might occur between making the Will and it coming into effect. Taking care to pass the right amount to charity in your Will can result in more assets passing to the non-charitable beneficiaries of the Will (because of the reduced rate) compared with a charitable gift amounting to just under the 10% threshold.

For example, if an unmarried person leaves a £500,000 estate, the IHT threshold is £325,000 and their taxable estate is £175,000. An increase in the legacy to charity in their Will from £15,000 to £17,500 would reduce the IHT rate to 36% and lead to a reduction in the overall tax bill for those inheriting the residue of the estate of £7300.

Unmarried couples

IHT planning is of importance to unmarried couples, with or without children, because they do not benefit from the spouse exemption from IHT that applies on gifts between married couples and registered civil partners. This means that if the estate of an unmarried person exceeds £325,000 (or in 2017/18 £425,000, if a share in a residential property is left to children or grandchildren), then 40% IHT will be payable on the excess over £325,000/£425,000 even if the estate passes to that individual’s partner. By comparison if the couple were married no IHT would be payable on the first death.

Unlike married couples, this means that the same assets can be taxed twice, on the death of each partner, which can increase the overall tax burden on the joint estates. The solution to this is to put a specified sum into a discretionary trust on the death of the first partner. An amount equivalent to the IHT nil rate amount at the time is usually recommended. The beneficiaries of the trust would be the surviving partner and others so that the surviving partner could benefit from the trust assets at the trustees’ discretion. However, the assets in the trust would not form part of the surviving spouse’s estate for IHT purposes so avoiding a double tax charge. Using a nil rate band discretionary trust in this way can save an unmarried couple up to £130,000 in IHT.

Protecting your legacy

Whether or not you have children, it is likely that you wish to see the assets that you leave passing to the beneficiaries that you have chosen in your Will and not suffering undue IHT charges. If you are leaving your estate to, say, your nephews and nieces a simple gift to them will mean that on their respective deaths the assets inherited by them are potentially liable to a 40% charge to IHT, in addition to the tax paid on your death. The assets will also be available to settle any divorce claims and to pay any care fees which your nephews and nieces may incur. By comparison, if your estate is left on discretionary trusts for your nephews and nieces there would be no 40% IHT charge on their respective  deaths and the assets in the trust would have a measure of protection against third party claims such as those that may arise on divorce or on bankruptcy. A charge to IHT would be due every ten years after the trust’s creation and on distribution of capital from the trust, but this will be at a maximum rate of 6% and will be at a known time, so the tax payment can be planned for.

Contact a solicitor

If you would like to discuss reducing the IHT burden on your estate, whether or not you have children, then do please contact us for further information.