The famous saying goes – “there are only two things in life that are certain, death and taxes” – and while it is certainly true that most people will pay tax at least in some point in their life, taxes paid after death are not always an inevitability with the right planning.
Last year HM Revenue & Customs (HMRC) collected a record £5.3 billion in Inheritance Tax (IHT) – up 13 per cent on the previous year.
These figures reveal a worrying increase in the number of estates affected by IHT, despite the introduction of various reliefs designed to minimise the impact of IHT on beneficiaries.
In the UK, individuals and families who wish to pass on their legacy tax efficiently need to seek specialist advice if they want to avoid being hit with hefty IHT bills.
IHT is levied at a rate of 40 per cent of an estate’s total value on all estates valued at £325,000 or more. This £325,000 threshold – also known as the ‘nil rate band’ – has remained frozen at this level for several years.
Fortunately, there are several options families and individuals can explore in order to mitigate their IHT liability. 
The RNRB 
One option worth investigating is the additional residence nil rate band (RNRB). First introduced in April 2017, this is an additional tax-free threshold families can tap into if they plan on leaving a residential property to their direct lineal descendants in their Wills.
As of 6 April 2018, individuals can pass on an additional £125,000 in property value to children, grandchildren, stepchildren and foster children completely tax-free by using this allowance.
As married couples or those in a civil partnership can combine their allowances, this means that couples can effectively pass on £900,000 worth of property completely tax-free if they seek appropriate advice to incorporate the RNRB into their Wills. 
Charitable legacies 
There are many other tax-saving opportunities available. For example, individuals can reduce the rate at which they will incur IHT on the total value of their estate by passing a portion of it to a charity when they die – and this might be a better option depending on circumstances and intentions.
By leaving 10 per cent of their estate to a charity, individuals will pay IHT at a rate of just 36 per cent as opposed to 40 per cent, reducing their overall IHT bill significantly. 
Lifetime Gifts 
One way of reducing IHT is to gift money to friends and family throughout your lifetime – but the rules governing IHT and gifting are notoriously complex and confusing.
Each individual is entitled to a £3,000 annual ‘gift allowance’ – meaning that gifts up to this amount will always be tax-free. However, anything above this threshold could attract IHT, depending on when the donor dies.
There is a ‘seven-year rule’ in place that governs gifts, which sees financial gifts to friends and family worth more than £3,000 only go IHT-free if the donor survives for seven years after passing on the money or assets.
Each time an individual makes a gift, this will be classed as a ‘potentially exempt transfer’ for IHT purposes – which basically means that if the donor dies within seven years, the exemption will no longer apply.
More confusingly, the rate of IHT incurred might reduce to a lower rate depending on the total value given away in the seven years (which could, in fact, be 14 years in certain limited circumstances) before the donor passed away.
Outside of potentially exempt transfers, however, individuals are also entitled to a number of other gift-based allowances which will never attract IHT, such as ‘wedding gifts’ of up to £5,000 for a child, £2,500 for a grandchild or £1,000 for anyone else.  
Gifts out of income 
Gifts provided from surplus income – i.e. income less usual expenditure to maintain your standard of living – are not considered as remaining part of a person’s estate, regardless of how long they survive for following the gift and should, therefore, be free of IHT.
Under the current rules, there is no limit on the amount that you can give away as a gift out of income, but it is recommended that a letter of intent is prepared when making such regular gifts. These could include paying for regular school fees or university tuition.
The rules surrounding IHT are complex so it is advised that you seek advice before beginning to plan your estate. At Grunberg & Co, we have helped countless families put their affairs in place so that the maximum amount of wealth can be passed on to future generations. To find out more about our IHT and estate planning services, please contact us.