Tony Granger examines the various things that increase your estate for inheritance tax purposes.
If you are aware of things that increase your taxable estate for inheritance tax (IHT) purposes, you can plan accordingly.
It is estimated that the Government will raise £3.1 billion from inheritance taxes in the tax year 2015/16. After your nil rate band (NRB) of £325,000 (and possibly, if married or in a civil partnership, the unused NRB of a deceased spouse or civil partner), the balance is subject to IHT at 40%.
What increases your taxable estate?
The main assets of most people are property (more specifically your home), investments and pension funds. Others have businesses, life assurance and trusts.
Worldwide assets
All of your assets, wherever situated, are subject to UK IHT if you are domiciled in the UK. You may live abroad, but if you have not severed all ties, and even if you have no intention to return to the UK, you may still be deemed to be domiciled in the UK and your assets could be subject to IHT.
Your principal residence
The market value falls into your estate. Only your share is generally subject to IHT on your death. From 2017, there is an additional potential NRB (‘residence nil rate band’) if the home is left to direct descendants (e.g. your children).
Other properties
Second homes, buy-to–let residential properties, commercial properties, and foreign properties can all fall into the estate. However, their usage in a farm or business may allow for agricultural property relief or business property relief reductions at up to 100%, if certain conditions are satisfied.
Other assets
Household contents, cars, personal effects, are taxable assets.
Gifts
- Gifts you made ‘with reservation’ (i.e. broadly where you gifted the asset, but still enjoy the use of it).
- Gifts made as a ‘potentially exempt transfer’ where you die within seven years; these will generally fall back into your estate.
- Gifts made as chargeable lifetime transfers (CLTs) that are in excess of the nil rate band; these will be chargeable (less any IHT already paid). CLTs commonly include gifts made to discretionary trusts by a settlor.
Trusts
- Certain ‘interests in possession’ flowing from a trust will normally be chargeable, where the trust was created on or after 22nd March 2006 (subject to certain limited exceptions).
- Transfers into trust where, for example, the settlor has retained an interest.
- Life assurance not underwritten in trust.
- The non-discounted portion of a discounted gift trust, if you die within seven years. This is a PET that will become chargeable (albeit possibly subject to taper relief in some cases).
Investments
- All non-exempt investments. These generally include individual savings accounts, venture capital trusts, share portfolios, investment bonds, national savings and most other investments.
- Surrender values of policies.
- Possibly cash or investments made on behalf of others, but in your name.
Business assets
- Business assets and shares unless relieved (for example) through business property relief. This would include shares in a family company which, for example is used to manage investments, where there is no definable trade, or where there are large cash holdings held as investments; such companies may not get any business property relief. Likewise, certain agricultural assets not used in farming may not qualify for agricultural property relief.
- Agricultural assets, unless relieved through agricultural property relief.
- Partnership current accounts following retirement from the partnership.
- Invalid ‘buy and sell agreements’ for shares passing on death.
Pension funds
- Certain pension funds passing to a non-spouse or non-civil partner – this could be a pension fund passing to your children or others on your death. Pension funds passing to a spouse or civil partner are not subject to IHT, but other tax charges can apply.
- Pension funds payable to your estate or where trustees fail to appoint beneficiaries.
- Previously funds in drawdown (however, the Government confirmed in the Autumn Statement 2015 that IHT will not arise when a pension scheme member designates funds for drawdown, but does not draw all of the funds before death).
- The capital value of an immediate or voluntary annuity, available at death.
Loans
- Loans that you have made to other people that are repayable on demand.
- A director’s loan to a company.
Practical Tip:
Substantial IHT savings can be made through proper planning. For example, place life policies into trust; use a double option agreement instead of a buy and sell agreement; reduce directors loan accounts; change investments to those that qualify for IHT relief.
