“My wife and I are in our late sixties, and we are fortunate enough to hold roughly £1 million in assets. We have no children. We are aware that this amount is above the Inheritance Tax threshold, what can we do to reduce our tax liability?”
As you may know, each person has an allowance of £325,000 (known as your Nil Rate Band – NRB). If your estate is worth more than this, a calculation will be done on your death to work out what inheritance tax (IHT) must be paid. Currently, the IHT rate on your estate above the NRB is 40%; however, there are further allowances that can be used to offset this.
On first death, assuming all assets are passed to the surviving spouse, there is no IHT payable at that point and no use of the NRB. If you die before your wife, you will have the option to pass any unused NRB to her, and vice versa. For example, if you do not use any of your £325,000 NRB on death, your wife could end up with a £650,000 NRB before IHT is payable. It is worth mentioning that this transfer is not automatic and must be claimed by the executor of the Will of the second person to die.
Making lifetime gifts could be considered, particularly if you are facing high IHT liabilities. There is a range of allowances where the gift is immediately considered to be outside your estate. Gifts over and above the allowances are considered completely outside your estate after seven years (known as Potentially Exempt Transfers – PETs, or Chargeable Lifetime Transfers – CLTs). However, if you die within seven years, some IHT may be payable.
Trusts are the usual recipients of CLTs. There are different types available, and so they could be a possible solution for you to manage at least part of your IHT liabilities. For example, you could place assets into a trust for the benefit of your children.
As long as you give up all access to the assets placed in trust, they will be out of your estate after seven years. If you still need some access, there are packaged solutions available that allow this yet still achieve an IHT benefit, e.g. Discounted Gift Trusts, Loan Trusts, or Flexible Reversionary Trusts.
Money put into a trust is considered a gift, which means that it is subject to the seven-year PET or CLT rules. It is critical to get financial and legal advice in respect of trusts to ensure you understand any implications.
It is worth mentioning that anything left to charity will be free from any IHT liability. If you leave at least 10% of your net estate to charity, then the IHT rate on your remaining assets will decrease from 40% to 36%.
I would highly suggest speaking to an Independent Financial Adviser as early as possible as this will allow you to mitigate your future IHT liabilities as much as possible.
Any opinions expressed in this article do not constitute advice. They assume the 2021/22 tax year and may be subject to change. The Financial Conduct Authority does not regulate Tax, Trust and Estate Planning.