& Tax Mitigation
When you die you may want your estate to pass on to your children, but inheritance tax (IHT) could reduce the amount that they receive. In 2019/20, a record £5.3bn was paid in inheritance tax to HMRC.
There are several solutions available which can enable you to sensibly plan for the succession of your estate.
Making a will
Making a will is a major part of estate planning as you can make sure your assets are distributed in line with your wishes. Without a will your assets will be distributed according to rules of intestacy. By having a valid will in place, you can choose how your estate is divided amongst your heirs on death.
Under UK law, your domicile determines if you will pay inheritance tax on death, not your residence. You may have a domicile of origin, be deemed domicile, or elect your domicile of choice. The most common for British expats in the Middle East is to have a UK domicile of origin, which is based on your father’s domicile. Therefore, living and working in the Middle East does not prevent IHT being due on your death, and your worldwide assets will be subject to tax by HMRC.
Our expert financial planners can help you understand your domicile and how you can plan for IHT.
Utilise Your Nil-Rate Band
In the tax year of 2020/21 the inheritance tax nil-rate band – the threshold up to which no IHT is due – is £325,000. Any unused amount of this nil-rate IHT band is transferable to a spouse or civil partner on death, resulting in a total nil-rate band of £650,000 for couples.
In the 2015 summer budget a new ‘main residence nil-rate band’ was created, which is currently £175,000 per person in 2020/21, which may reduce IHT due on property. This means that couples have a total nil-rate band of £1 million, including their main residence. The main residence nil-rate band may only be used when the property is passed on to ‘direct descendants’.
All transfers between UK domiciled spouses and civil partners are exempt from IHT. Without planning, any part of your estate above the nil-rate band that passes to other beneficiaries will be taxed at 40%.
Election for Non-Domiciled Spouse to be Treated as UK Domiciled
A non-domiciled spouse or civil partner can, at any time, make an election to be treated as UK domiciled for the purposes of inheritance tax. This may be a favourable option for a mixed domicile couple where the UK domiciled spouse dies first. In this case, the non-domiciled surviving spouse can elect to be treated as UK domiciled for IHT purposes, and any assets received by that spouse will be exempt from inheritance tax. If the election were not made by the surviving spouse, only assets up to the nil-rate band value of £325,000 would be exempt. Therefore, by making the election, inheritance tax can be deferred to the second death.
Gift Your Assets Away
Gifting your assets may enable you to reduce inheritance tax. Gifts up to £3,000 per year will be exempt from IHT, as will gifts from normal expenditure. You may also gift £5,000 towards a child’s wedding without it falling under the IHT umbrella.
Potentially Exempt Transfers (PETs) are gifts of unlimited value which will become exempt from IHT if you survive for at least seven years following the making of that gift. If you die within seven years of making the gift, any IHT due will be reduced on a sliding scale. To qualify as a PET, the gift must be made by an individual to another individual or specified trust.
Chargeable Lifetime Transfers (CLTs) are gifts made above your nil-rate band which are liable immediately for IHT, however at a reduced rate of 20%. CLTs are subject to the same seven-year taper rule as PETs, whereby death within seven years can increase IHT due to the full 40% which reduces on a sliding scale.
Put Your Assets into a Trust
By placing assets into trust, you can plan for the succession of your assets on death in a tax-efficient manner. Certain trusts allow you to continue receiving a passive income from your assets, whilst the assets themselves will be allocated to your nominated beneficiaries on your death.
Asset transfers into trust will be classified as a PET or CLT, depending on the trust structure used. If you survive for seven years after transferring your assets, the trust will be considered outside of your estate for IHT purposes.
Other Exemptions and Tax Reliefs
Any gifts or succession made to charities, political parties, universities, or for ‘national purposes’ or ‘public benefit’ will be exempt from IHT. If you leave at least 10% of your net estate to charity, your IHT rate on remaining assets will reduce from 40% to 36%.
Tax relief may also be available, in certain cases at 100%, on business assets and agricultural property.
Take Out Life Insurance
You could cover any potential liability for IHT by taking out a life insurance policy equivalent to the expected IHT bill. Life insurance to cover an IHT bill should be taken on a ‘Whole of Life’ basis and placed into trust to ensure it is paid outside of your estate. Life insurance proceeds create immediate liquidity and prevent the forced sale of an asset to pay a tax bill.
Any existing life insurance policies should also be place into trust to prevent it forming part of your estate on death.
Quite simply, spending allows you to enjoy your lifestyle and reduce the value of your estate, therefore reducing the amount of IHT due on your death. Sensible decumulation planning can help you make the most out of a passive income from your assets; working with one of our financial planners can help you find a balance between expenditure and succession planning.