Darlington solicitors, Latimer Hinks, warn clients that they may be paying too much in inheritance tax and suggest steps to limit potential exposure to tax.
Gillian Ibbotson, an estate, wealth and tax planning specialist at Latimer Hinks Solicitors, explained: “The pandemic has caused a tragic loss of life in the UK and across the world, and has focused people’s minds on the importance of reviewing their affairs and taking steps to secure their and their families’ futures.”
Each person has an allowance that can be given away without incurring inheritance tax, known as the Nil Rate Band (currently £325,000). However, there are ways writing the will to limit potential exposure to inheritance tax.
Additional allowance can be claimed in relation to a person’s home, but only if the home is passed on to children/grandchildren free of restriction. Similarly, there are ways to structure married couples’ wills to secure unused allowances which may have been due to a predeceased spouse, even where the widow(er) has since remarried. It is even possible to structure a will to reduce the applicable tax rate from 40% to 36% using charitable gifting.
Structuring family businesses, including farming businesses, in such a way as to attract Business Property Relief and/or Agricultural Property Relief is hugely valuable and can in some cases allow high value assets to pass down through generations free of inheritance tax.
Gifting is also a useful tool to “chip away” at a potential liability. Each person has an annual exemption of £3,000 which can be given away each tax year without impacting their inheritance tax position. There are also exemptions for small gifts under £250, some wedding presents, payments to help dependents with living costs, gifts made from excess income and donations to charities and political parties.
Individuals can also make larger gifts of course, which would have a more significant impact in reducing their estate for inheritance tax purposes, but HMRC will include any gifts made in the 7 years prior to death when calculating an estate’s inheritance tax liability. This essentially means that a person must survive for 7 years from making a large gift in order for it to be really effective inheritance tax planning.
Making large gifts can be great tax planning, and helpful for recipients particularly in times such as these. However, they must always be carefully considered before being made. It might be that large gifts are better made in a protective way, allowing beneficiaries use of assets/funds without exacerbating any inheritance tax exposure they might have themselves, or leaving the family wealth vulnerable to loss through a recipient’s later divorce/bankruptcy etc.
Gillian concluded: “There are some really effective ways to limit a person’s potential exposure to inheritance tax, however it is essential that specialist advice is taken in good time. There is no ‘one size fits all’ here. All families have their quirks, and will have different priorities. Passing on family wealth can have a huge impact, not just in terms of tax, and the independent view of a specialist in this area can be invaluable in helping to consider your options.”