Taxing Death – How to Plan For Inheritance Tax

In the early 1920s, Maud Alice Burke was reduced to selling her jewellery and replacing it with costume pieces.  A few years earlier, George Herbert was forced to sell much of his furniture.

George and Maud were not impoverished working-class people, fighting to stay afloat in post-war Britain.  They were, in fact, Lord Carnarvon and Lady Cunard, members of Britain’s titled aristocracy, who had enjoyed extraordinary wealth and privilege up until the Great War.  But, like many others in their social circle, the introduction of inheritance tax had taken its toll, requiring them to liquidate assets fast.

The Finance Act of 1894 introduced modern inheritance tax, (known at that time as ‘Estate Duties’).  It replaced earlier legislation including the 1796 tax on estates brought in to help fund the Napoleonic wars. The earliest death duty can be traced back to 1694 when probate duty, a tax on personal property in wills proved in court, was introduced.

Following the end of the Great War, the British government, heavily in debt, raised the Estate Duties threshold to 40% on estates valued at over £2 million[1].

Inheritance tax was always meant to be a tax on the wealthy.  But, with the rampant rise in house prices over the past 20 years, especially in London and the South East, ordinary families are now caught in the net.  If this applies to you, then, like generations of wealthy landowners before you, you need to be smart about lowering your estate’s exposure to inheritance tax, so your descendants can be the primary beneficiaries of the fruits of your labour.

The basics of how Inheritance Tax is calculated

As at the time of writing, the basic calculation of inheritance tax is as follows:

• Your estate will owe 40% on anything over and above the £325,000 Inheritance Tax threshold when you die.
• If you leave 10% of your estate to charity, the Inheritance tax owned is reduced to 36%.
• A married couple can pool their tax-free band together if they leave their estate to one another. So, if one spouse passes on their estate of £650,000 to the other, upon the latter’s death, there is no Inheritance Tax to pay.

The Main Residence Nil-Rate Tax Band

In April 2017, the Main Residence Nil-Rate Band came into force.  Although it could save the children of a married couple up to £80,000 in IHT, rising to £140,000 by 2020/2021, it is rather complicated.  One does wonder why the government did not simply raise the Inheritance Tax threshold to make life simpler for all.

The Main Residence Nil-Rate tax band works like this: from 6^th April 2017, provided you pass your family home onto your direct decedents, the first £100,000 of the property’s value will be tax-free.  This threshold will rise by £25,000 every year to £175,000 by 2020/21.

To qualify for the Main Residence Nil-Rate Tax Band, the following conditions must be met:

• You must have lived in the property at some point. Buy-to-lets are unable to attract the Main Residence Nil-Rate Tax Band.  If you own multiple properties, the tax relief can only be applied to one of them.
• The property must be left to your ‘direct decedents’ which can include children, grandchildren, step-children, adopted children, foster children and the spouses of these people.
• If your estate is worth more than £2 million, the Main Residence Nil-Rate Tax Band is reduced by £1 for every £2 that the estate is valued over £2 million.

Steps to take to lower the overall Inheritance Tax Bill on your estate when you die

To reduce your Inheritance Tax Bill, you should consider taking the following steps:

1. Make sure you have a valid, up-to-date Will.
2. To ensure you can take advantage of the Main Residence Nil-Rate Tax Band, contact a solicitor if any of the following arrangements apply to your current circumstances:
   • the property is currently held in a discretionary trust
   • you and your spouse own your property as Tenants in Common and plan to place the share of the first to die in a discretionary trust
   • part of your estate is being left to grandchildren subject to an age contingency
   • you plan to leave your main residence to someone other than a direct descendant
3. Consider gifting some of your assets. As long as you survive more than seven years after passing on the gift and the gift is genuine, it will be tax exempt.
4. Get specialist legal advice before creating a trust, as most trusts are now subject to Inheritance Tax.
5. Give away £3,000 a year.
6. You can gift up to £5,000 tax-free to your child upon their wedding. Grandchildren may be given £2,500 and anyone else up to £1,000.

In summary

Planning for later life is a lot simpler with the help of an experienced solicitor.  If you wish to plan for avoiding Inheritance Tax, contact our team today who will be happy to explain your options to you.

Hart Reade Solicitors is a full-service law firm with offices in Eastbourne, Hailsham, Polegate and Meads.  We hold a Lexcel accreditation from the Law Society of England and Wales, and are a member of The Association of Lifetime Lawyers.  To make an appointment with one of our private client solicitors, please phone our office on 01323 727 321.

Please note, this article does not constitute legal advice.

[1] Maximum death duties rose to 65% following WWII

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Please note the above is for information purposes only and is intended to be a short summary. It should not be treated as a comprehensive guide and should not be acted on without qualified legal advice.