Inheritance Tax is (allegedly) consistently voted as the UK’s “most hated tax”. If you are at the stage in your life where you are thinking about Inheritance Tax planning you may be wondering if there is anything you can do to minimise the inheritance tax bill that your loved ones will pay on your estate when you die.
It is a huge topic, and it is very important to give our usual caveat that every individual needs to consider their own circumstances, but in this article, Ed (a salaried GP but also a Chartered Accountant and Chartered Tax Adviser) gives an overview of inheritance tax and some general advice on inheritance tax planning.
Inheritance Tax Overview
Inheritance tax may become chargeable when an individual dies and is levied on the value of the deceased’s estate. There are two primary rates of inheritance tax: 0% and 40% with 0% applying to the first £325,000 of the estate and 40% afterwards. This £325,000 is called the “nil rate band” because up until that point the rate of inheritance tax is nil. Any inheritance tax that is due is paid by the deceased’s estate before the assets are gifted out.
Because HMRC don’t want people to avoid paying inheritance tax on their deaths by giving all their assets away before they die, they also take into account any transfers of value out of the estate in the previous seven years before death. The nil rate band of £325,000 applies to these transfers until it is exceeded and then the 40% rate will apply on any further transfers and to the estate on death. If a transfer to an individual becomes chargeable to inheritance tax, the recipient must pay the inheritance tax due.
There is also an additional residential nil rate band for residential property worth £175,000 if a qualifying residence if passed on death to a direct descendent. A parent passing on their property and assets to their children may in total have a nil rate band in total of £500,000 that is £325,000 plus the residential nil rate band of £175,000. There is more to this, of course, but that is the basics of the “Residence Nil Rate Band.”
Very importantly, transfers to a spouse or civil partner (whether in an individual’s lifetime or on death) are exempt from inheritance tax. Also, any charitable donations or donations to qualifying political parties (I wonder why that is the case?) are exempt from IHT.
Find a specialist medical financial advisor with Medics Money
Advice on inheritance tax planning
When it comes to inheritance tax planning, and minimising liabilities, many of us will want to discuss estate planning with an Independent Financial Advisor or IFA (if you need one, you can find a Medics Money approved specialist IFA here: https://medicsmoney.co.uk/medical-financial-advisor/.
But is there any advice on inheritance tax planning that can apply to us all? Put simply, yes there is. While everyone’s personal circumstances are unique there are some simple ways to start minimising any future IHT liabilities.
Firstly, as we said above, transfers to a spouse or civil partner (or charity or political party) are exempt so any assets gifted to them will not be caught in the IHT net in lifetime or death. Likewise, any gifts to sports clubs, housing associations and national heritage bodies such as museums are exempt.
Secondly, everyone gets an annual exemption of £3,000 (like a Personal Allowance for IHT) each tax year. You can also carry forward the annual exemption from the previous tax year as well if unused (or part of it if partly used). So, if I gift £5,000 to my nephew today I could use my annual exemption for this tax year and £2,000 from the previous tax year, if unused, and so the entire £5,000 should be exempt from IHT. Relatively small amounts but it all helps.
Thirdly there are some smaller exemptions that can be useful:
- Small gifts of up to £250 to any one donee in any tax year are exempt. So if you are putting money in birthday cards to your grandchildren etc then these are exempt up to £250 in the tax year. Note that if you go over this amount then the whole amount is treated as a transfer for IHT e.g. if I pay my nephew £300 then the whole £300 is a transfer, not the excess over £250.
- There are some exemptions for wedding and civil partnership
ceremony gifts as well. For example, a parent can give up to £5,000 to a child and up to £2,500 to a grandchild and these gifts will be exempt from inheritance tax. Wedding gifts of up to £1,000 can be made by any person free of IHT. The exemption applies per ceremony.
Fourthly we mentioned that HMRC don’t want you to give away all your assets before death to avoid IHT BUT any transfers may potentially be exempt from IHT – these are called “Potentially Exempt Transfers” or PETs. If you transfer assets and die within three years this is a transfer of value for IHT but if you die more than seven years after the transfer the transfer is fully exempt. So seven years is the magical number here. In-between three and seven years, taper relief applies reducing the amount of the transfer that is chargeable – the longer the timeframe between the gift and death the less is caught in the IHT net. This has led to some people giving away any surplus assets to their loved ones sooner rather than later as it is then more likely that these transfers will not be chargeable to inheritance tax. So, looking at your personal circumstances, you may want to consider this yourself if you are looking to reduce your estate’s IHT exposure.
Finally, there is an exemption that is becoming increasingly popular as a way of transferring value to family members. Gifts that constitute “normal expenditure out of income” are exempt from IHT. “Normal” means something that is typical or has become a habit i.e. happens year after year and the transfer has to leave the donor with sufficient income to maintain her normal standard of living. There is no monetary limit on this exemption because different individuals have different levels of income and what is ‘normal’ expenditure out of that income will vary from person to person. This has led to some people, for example, paying yearly school fees for their grandchildren without there being any IHT consequences because the amounts involved have become habitual and have not impacted on the standard of living of the payer.
Summary
This is some basic advice on inheritance tax planning but these are all important measures and together can really add up, in particular utilising PETs and establishing “normal expenditure out of income” as ways of transferring value in life to avoid IHT.
If you need more specific advice (and there is a whole world of estate planning out there!) you can find a specialist medical Independent Financial Advisor here:
https://medicsmoney.co.uk/medical-financial-advisor/
One final thing…
In our recent survey of over 6,000 doctors, 68% did not have a will. Without a will you will not be able to direct where your assets go on death – instead they will follow the general rules of intestacy which may not be what you want. For example if I died without a will the rules say that all my assets will go to my elderly parents while I would prefer that they want to my sisters – only a will allows me to direct my assets as I would like.
If you are one of the 68%, get a will asap – you never know what is around the corner. If you want to find a lawyer that specialises in wills for doctors you can use this link (if you like – the key thing is you get a will asap!)
