According to the latest data from HMRC, the UK average inheritance tax (IHT) bill in 2018/19 was £209,502, with those in the North West paying the lowest average IHT bill of £152,898.
But what is inheritance tax, and what plans can be put in place to mitigate a potential bill?
Inheritance tax
Inheritance tax (IHT) is tax charged on the estate (the property, money and possessions) of an individual once they have died.
Most people will find that they will not pay any IHT in the event of their death, as the total value of their estate does not exceed the £325,000 nil rate band or is exempt because left to a spouse.
However, for those whose estate does exceed £325,000, there are a number of tax planning opportunities which could be put in place to reduce your exposure to inheritance tax upon death, some of which we outline below.
Gifting to future generations
A common way to reduce an individual’s tax burden upon death is by gifting surplus assets to future generations.
Gifts can include money, household and personal goods, property, stocks and shares, but doesn’t include anything which has been left in your will. The value of your estate (i.e., all your money, property and possessions left when you die) will determine your IHT bill.
Generally, gifting in this way is classed as a ‘potentially exempt transfer’ (PET), and no inheritance tax will need to be paid, except if the donor were to die within seven years of the gift being given. If you were to die within seven years of the gift, then this may be included in your estate for inheritance tax purposes.
Are there any other exemptions?
There are various other exemptions available which an individual can take advantage of each tax year they are alive, even if they were to die within seven years of the gift.
Utilising these exemptions can be a very useful way to reduce your taxable estate, whilst mitigating your IHT bill.
Spouse exemption
There are no limits on how much you are able to gift to spouses or civil partners during your lifetime, as long they live in the UK permanently and you are in a legal marriage/civil partnership.
Annual exemption
Individuals are able to take advantage of an annual exemption of £3,000 per tax year, meaning you are able to gift up to £3,000 per tax year, free of IHT. The £3,000 can be gifted to one person or shared between a number of people – if this was utilised over a number of tax years, it could be a relatively easy way to decrease your IHT bill upon death.
Individuals are also able to carry forward any unused allowance to the next tax year – after which, if it is unused, it will be lost.
Small gift allowance
You can gift up to £250 as many times as you like in each tax year, to an unlimited amount of people, as long as you have not used another allowance on the same person.
Wedding/civil partnership gifts
Each tax year, individuals can give a tax-free gift to someone who is getting married or starting a civil partnership. The amount varies depending on your relationship:
- £5,000 to your child
- £2,500 to your grandchild or great-grandchild
- £1,000 to any other person
Regular gifts out of income
Individuals are able to gift regular payments out of income (rather than capital) which are outside the scope of inheritance tax – to which the only limit on how much you can give tax-free is the amount of surplus income available.
A gift such as this is exempt from inheritance tax provided it is made from the normal expenditure out of income of the donor i.e., their monthly income and leaves the donor with sufficient income to maintain a normal standard of living. It is important to establish a regular patterns of such gifts and document this – we can advise on the best way to do so.
Get in touch
To find out more about how we can help you plan efficiently to reduce future tax liabilities, please get in touch with Jane Parry using the button below or by calling 01254 604329, or Wendy Anderson, by emailing wendy.anderson@pmm.co.uk or calling 01254 604304.
