Inheritance Tax ‘spring clean’

Making a will is one of those important life tasks that is tempting to put off for another day. However, if you die intestate you risk leaving a considerable headache for your beneficiaries. 

Why not use this spring as an opportunity to make or update your will and do a bit of inheritance tax (IHT) ‘spring cleaning’.

Wills and Trusts

Most married couples or civil partners will leave their estate to each other on the first death with children inheriting on the second death. This makes sense as the arrangement is simple, easy to understand and the spousal exemption means that no IHT is payable on the first death. 

However, family circumstances change, children and grandchildren arrive, couples separate and remarry and every change may necessitate drafting a new will. 

So, is it worth considering whether a more flexible arrangement may be appropriate?

Family Trust

Settling assets into a Trust for existing and future beneficiaries will avoid frequent re-writing of your will. Trustees will have the power to appoint assets according to the future needs of beneficiaries including those not yet born when the trust was settled.

A Trust will also allow income arising from Trust assets to be shared across the wider family beneficiaries making best use of available personal allowances and lower rate income tax bands.

Crucially, a Trust will also provide asset protection, which may be particularly important if potential beneficiaries are young, or in the event of a remarriage.

IHT

A married couple can put value of two times the nil rate band (frozen at £650,000 until at least April 2028) into a Trust every seven years without an immediate IHT charge. This amount will be protected from future IHT charges for the lifetime of the Trust.

Any future growth in asset values on Trust assets will be outside of your estate.

In some circumstances assets qualifying for special reliefs (like business relief and agricultural property relief) can be transferred into a Trust without impacting a person’s nil rate band so offer additional planning opportunities.

Learn more about Trusts in our comprehensive Trust in Trusts brochure.

Learn more about Trusts in our recent insight.

Lifetime gifting

A lifetime gift from one individual to another is a potentially exempt transfer (PET). If the donor survives for seven years after making the gift the value will fall outside of their estate and will be exempt.

If they survive for fewer than seven years the gift will ‘fail’ and may be chargeable to IHT depending on the total value of the estate. However, a taper relief will apply if you survive for at least three years to reduce the rate of IHT payable.

Even if full IHT exemption is not achieved, in a period of high mortgage interest rates, lifetime gifts may enable the next generation to reduce their mortgage burden and make significant interest savings in the interim period.

Any future growth on assets or reinvested cash gifted will also fall out of your estate and reduce the final IHT liability.

Annual exemptions – use it or lose it

An annual exemption of £3,000 is available each year and if you have not used last year’s exemption, you could gift up to £6,000 free of IHT in the next tax year.  

Regular gifts out of excess income are also exempt from IHT and are a potentially extremely valuable way of mitigating IHT if done correctly.

For help, advice or more information on how we can help you with effective IHT planning, please contact Richard Bull or your usual Crowe contact.