IHT has existed in some form since 1694 and has changed considerably over the years. In 1796 a tax on Estates was introduced to fund the war against Napoleon. In 1894 an Estate Duty was introduced to pay off a £4 million government deficit. Generally, each new tax replaces the old.
The Inheritance Tax rules have become more burdensome over time. For example, a Lifetime Gifts Tax was introduced in 1974 and various loopholes being closed mean that individuals are no longer able to retain a benefit from their assets whilst moving them outside of their Estates for Inheritance Tax purposes, even if they pay a nominal rent during their lifetimes.
It appears that this theme is not set to change in the foreseeable future. Despite inflation, the Nil Rate Band has not been increased since 2009, with an expectation that it will remain frozen until 2028.
So, it is more important than ever that individuals understand their Inheritance Tax exposure and most importantly, are aware of the tax-free reliefs that may be available to them.
What are the rules?
Each individual has an IHT-free threshold of £325,000 (known as the Nil Rate Band). Assets over this amount (that cannot benefit from any other kinds of relief) will be taxed at 40%.
If you have children who will inherit your main home, you may benefit from an additional allowance of up to £175,000, known as the Residence Nil Rate Band (RNRB).
The Do’s and Dont’s!
Do…
- Try to keep your total Estate under £2,000,000 to make sure you benefit from the RNRB which starts to decrease when your Estate reaches this value. This could be the difference of £70,000 in tax.
- Gift during your lifetime. If you find that you have funds that you do not need, consider passing these to the next generation while you are still alive.
- Include charities in your Wills. If there is a charity that is special to you, take some time to learn about the Charitable gifting and the effect that this will have on your Will.
Don’t…
- Assume all business assets can pass free from Inheritance Tax – to benefit, a company must be “trading” and you may be surprised as to HMRC’s view of what is and is not a trading company.
- Give away an asset and continue to use it. If you make a gift, you must separate yourself from that asset entirely or risk it still being deemed to be part of your Estate for Inheritance Tax purposes.
- Assume that assets, liquidated from investments, will always be “excess income”. Be sure you fully understand what constitutes excess income from HMRC’s perspective.
If you would like to discuss Inheritance Tax Relief, please get in touch with our Amy Pyman by telephone on 0191384 2441 or email at ajp@swinburnemaddison.co.uk.
