Tax Planning

The most significant tax planning relevant to Wills is inheritance tax. Not only do you have to consider the tax regime as it applies now, but also as it is likely to apply at the time of death. However, it is also possible to change the provisions of a Will following death to reduce tax liability.

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Inheritance Tax

What Is Inheritance Tax?

Inheritance tax is the tax payable on any asset transferred out of the estate, unless it is an exempt transfer or was for value (i.e. something was sold at a proper market value). Transferring your home to a child of yours is unlikely to avoid inheritance tax if you continue to live in it without paying a proper rent.

The nil-tax band for inheritance tax varies each year with the Budget (currently £325,000) and the rate can also vary (currently 40% on everything over the nil-rate band). On death the whole of your estate is transferred, but liability for inheritance tax also arises on transfers made within the previous 7 years.

Are There Any Exemptions From Inheritance Tax?

Current exemptions from inheritance tax on transfers made during your lifetime or after death are as follows:

1. Gifts

  • Gifts made more than 7 years before death
  • An annual exemption of £3,000
  • A small gift exemption to any one individual of £250
  • Normal expenditure out of your income
  • Gifts in anticipation of marriage/civil partnership up to £5,000 from a parent, £2,500 for more remote family or between the parties and £1,000 in all other cases

2. Armed forces deaths

  • In current times no inheritance tax is payable where death is as a result of active service in the armed forces or their ancillary services.

3. Transfers to Spouse or Civil Partner

  • If you are married or in a civil partnership when you die and living in the UK, any assets passing to your spouse/civil partner are exempt from inheritance tax provided the spouse/civil partner is also living in the UK. If they are not living in the UK, a limit of £55,000 applies. To qualify the asset must be transferred immediately or within 12 months of your death.

4. Bequests to Charity

  • You can leave as much as you like to charity as long as the amount is transferred immediately or within 12 months of your death.

What About Capital Gains Tax?

While it may be possible to transfer assets during your lifetime, these may give rise to a liability for Capital Gains Tax. This tax is a charge made on the increase in value of an asset or the profit made from an asset and is currently based upon the highest rate of income tax you pay. If you are not careful you could end up paying more in capital gains tax trying to avoid inheritance tax, than you would inheritance tax on death. The best thing is to speak to an expert, whether it’s a solicitor or tax accountant.

What If There Isn't Enough Money To Pay The Tax?

When planning how to deal with your estate it is essential you take account of potential tax liabilities. If there are insufficient assets in the estate to pay the tax then the person who receives the asset has to pay it. So, if for example you are cohabiting and leave your share in your house to your partner there is a real risk they will have to sell the house to pay the tax liability.

This is only a very brief summary of what is a complicated area. It can also become even more complicated on death, as reliefs can be claimed such as "quick succession relief". This is where you have received an asset within the last 5 years on which inheritance tax was paid. The amount chargeable to inheritance tax depends on how long the asset has been held.

What Should You Do Now?

If you are considering inheritance planning or are trying to deal with the estate of someone who has died, we recommend you consult an expert. Call us now so we can best advise you on your next steps.