Rising house prices in London and the South East have dragged thousands more into the IHT net, leading to a record £5.2bn haul for HMRC in 2017/18. This is despite new allowances designed to reduce the bill for homeowners.
There are a number of steps you can take to potentially reduce your IHT bill, or even how to avoid inheritance tax entirely, as long as you plan ahead.
Inheritance tax threshold
After you die, your estate – which includes property, savings and possessions, but not your pension – may be subject to inheritance tax if the value exceeds £325,000. This threshold is called the nil-rate band. Anything above that amount, which is fixed until 2021, is taxed at a flat rate of 40 per cent.
There are exceptions, however. If you leave your whole estate to your spouse or civil partner, for example, there will be no tax to pay. The same applies if you leave your estate to charity.
An additional allowance introduced in 2017 gives homeowners an extra £125,000 if they are passing their house to their children or grandchildren. This means homeowners can currently pass on £475,000 (£325,000 + £150,000) tax free. This ‘resident nil-rate band’ rose to £150,000 for 2019/20 and will rise to £175,000 in 2020/21, after which it will rise in line with inflation.
When do you pay inheritance tax?
The executor of your will should pay any IHT owing from your estate within six months of your death. After this time, HMRC can begin charging interest on the outstanding amount. If there is no will, the administrator of the estate will pay the bill. If there is not enough cash in the estate, assets can be sold to raise funds. Once the tax and any other debts or liabilities are paid, the remaining assets can be distributed to your beneficiaries.
How do you pay inheritance tax?
The outstanding amount is paid directly to HMRC. First, however, your executor or administrator will need to apply to HMRC for a payment reference number. This can be done online or by post. The bill can then be paid directly from an account in the deceased’s name, or an executor can pay it and then claim the money back from the estate.
How to avoid inheritance tax
The easiest way to eliminate IHT is to leave your estate to your spouse or civil partner but, if that’s not an option, there are other ways to reduce your liability.
Save into a pension
Unlike a regular savings account, money held in a pension is not subject to IHT. There can be circumstances where IHT is payable on pension funds, such as death within 2 years of a transfer to a new pension plan. Pensions also grant you valuable tax breaks that make them even more appealing. Be aware, however, that there may be other taxes to pay when pensions are bequeathed, such as income tax depending on your age at death and your beneficiary’s circumstances.
Give your assets away
This requires some forward planning. Each person has a £3,000 Annual Gift Exemption which allows the gift to be immediately exempt from IHT. Any further gifts, such as paying for private school, above this amount in the same tax year maybe subject to IHT should you die within 7 years of making that gift. After 7 years the gifts will be exempt.. Any gifts that do become chargeable to IHT, these gifts will use your nil rate band first. This means that the gifts themselves will not be subject to tax, but will have an effect on the remainder of your estate.
Use a trust
By putting your assets into a trust, they (generally) no longer belong to you and therefore are not counted as part of your estate if you survive for 7 years after putting the asset into trust. This can be a good way to leave assets to children or grandchildren because you can set conditions around when and how the money or other assets can be accessed and used (such as when they turn 18).
Give to charity
Any donations you give to charity, either while you are still alive or in your will, are exempt from inheritance tax. As an added bonus, if you leave at least 10 per cent of your net estate to charity, the IHT paid on your remaining estate falls from 40 to 36 per cent
Consider taking expert advice
If you think you might be caught in the IHT net, it could pay to speak to a professional adviser. Tax rules are complicated and a mistake could be costly.
The Telegraph has partnered with St. James’s Place Wealth Management to help you potentially reduce or eliminate your IHT liability legally and responsibly, leaving more money to pass on to your beneficiaries.
Book a no-obligation appointment with an expert from the Telegraph’s Inheritance Tax Advice Service
The levels and bases of taxation and reliefs from taxation can change at any time. Tax relief depends on individual circumstances.
Advice relating to a Will necessitates the referral to a service that is separate and distinct to those offered by St. James’s Place. Wills are not regulated by the Financial Conduct Authority.
Trusts are not regulated by the Financial Conduct Authority.
St. James’s Place representatives represent only St. James’s Place. The Telegraph Investment, Retirement & Tax Planning Advice Service is provided by St. James’s Place Wealth Management plc, registered in England, registered no. 4113955, registered office St. James’s Place House, 1 Tetbury Road, Cirencester, Gloucestershire, GL7 1FP. Telegraph Media Group is an Introducer Appointed Representative of St. James’s Place Wealth Management plc, which is authorised and regulated by the Financial Conduct Authority. Telegraph Media Group Limited, 111 Buckingham Palace Road, London, SW1W 0DT, company registration number 451593.
The above article was created for Telegraph Financial Solutions, a member of Telegraph Media Group. For more information on Telegraph Financial Solutions, click here