For many taxpayers, Inheritance Tax (IHT) planning always seems to be on the bottom of their ‘to do list’. However, with the introduction of the Residence Nil Rate Band (RNRB), Simon Littlejohns, partner and Head of Tax at Birmingham accountants and business advisers Friend Partnership, advises that now is the right time to undertake some simple IHT planning.
The RNRB was introduced on 6 April this year and forms part of previous commitments to increase the IHT threshold for couples to £1 million. The RNRB is set at £100,000 in 2017/18, rising in £25,000 increments until 2020/21. The introduction of the RNRB means that the estates of many taxpayers may now fall out of the IHT net, particularly if taxpayers are savvy with their IHT planning.
IHT planning – some considerations
Here are some useful tips to consider when carrying out IHT planning:
Nil rate band
- For spouses and civil partners, any unused nil rate band (currently £325,000) of the first to die is available to the survivor on their death so a potential £650,000 on the second death;
- The RNRB is only available in respect of closely inherited residential property. There is a host of conditions here. The full rate of £175,000 is not available until 2020 and like the existing nil rate band it is transferable;
- The two nil rate bands will give an individual £500,000 IHT free with £1 million in total for a couple.
- Always keep a record of the gifts which have been made. This does not need to be sent to HMRC but it will help executors to decide which, if any, gifts need to be considered for IHT purposes post-death;
- Gifts which are made 7 years before death all fall out of account;
- There is an annual exemption each year of £3,000 along with certain other exemptions for small gifts, gifts in consideration of marriage and gifts to charity;
- Normal gifts out of income are ignored. Here it is important to establish a pattern of gifting to satisfy the ‘regular’ element. Appropriate evidence will need to be retained to demonstrate that the gifts are made out of surplus income. This relief can be useful for grandparents funding grandchildren’s school fees for example;
- There is a reduction in the IHT rate applicable to the estate where the individual concerned has left at least 10% of the estate to charity.
Investments, pensions and debts
- Certain investments may have a favorable treatment for IHT purposes namely agricultural and business property. If certain conditions are met 100% relief from IHT is available. Note such property must be held for at least two years prior to death for it to qualify. There is a range of investments in the marketplace which may qualify for relief so taxpayers should look at their investment portfolios to see whether any realignment is needed. Remember to consider other taxes as part of any realignment exercise;
- Watch borrowings and how the debts will be deducted on death. In light of recent changes to the legislation the new rules may not give the result that taxpayers want/expect;
- Pension arrangements should be reviewed. Pension funds can now be passed to beneficiaries IHT free.
- Make sure that wills and powers of attorney are up to date.
IHT planning doesn’t have to be as onerous as people expect. With an IHT rate of 40%, there are some significant savings which can be made which will be no doubt welcomed by the beneficiaries. I would certainly encourage individual taxpayers to advance IHT planning up their ‘to do list’.