What Can Reduce Your Taxable Estate?

It is estimated that the Government will raise £3.1 billion from inheritance taxes in the 2015/16 tax year. There are plenty of traps for the unwary, where value will be taxable in your estate on death. The inheritance tax (IHT) reduction measures outlined below should help you to plan accordingly. IHT is generally payable on death at a flat rate of 40% on your worldwide qualifying assets, if domiciled in the UK. However, there are certain exemptions and deductions that reduce your taxable estate for IHT purposes.

Reducing your taxable estate
Nil rate band
The nil rate band (NRB) is currently £325,000. Every person has a NRB that can reduce their taxable estate. If your spouse’s estate did not fully utilise their NRB on an earlier death, their unused portion can generally be added to yours, to reduce your estate even further. From April 2017, if your house is left to your children, you may be able to get a further £100,000 ‘residence NRB’, rising in incremental amounts £175,000 by 2020/21.

Outright exemptions
The following are outright exemptions for IHT purposes.

Annual exemption (IHTA 1984, s 19)
Anyone can make a gift of up to £3,000 each year, free of IHT. Any unused balance from the previous year may be carried forward to the current year (but not beyond), giving you £6,000 in that tax year.

Small gifts exemption (IHTA 1984, s 20)
You may make gifts of up to £250 to any person in a tax year, and such gifts would be exempt. Any number of gifts may be made to different people in this way.

Gifts in consideration of marriage or civil partnership (IHTA 1984, s 22)
The limits for any one marriage are as follows:
- £5,000 given by a parent of a party to a marriage;
- £2,500 by a grandparent or ancestor or by a party to the marriage;
- £1,000 if given by anyone else.

Gifts between spouses (or civil partners) (IHTA 1984, s 18)
There is no limit on the amount that may be gifted between spouses (or civil partners) if both individuals are domiciled in the UK.

Gifts to a charity (IHTA 1984, s 23)
These must become the property of the charity, or be held in trust for charitable purposes. If 10% or more of the deceased’s net estate is gifted to charity, the IHT rate potentially falls to 36%.

Normal expenditure out of income (IHTA 1984, s 21)
If you have excess income, not required for normal living expenditure, this income may be gifted to third parties (e.g. a grandparent making regular payments to a grandchild for his mortgage loan), exempt from an IHT charge.

Gifts for maintenance
In addition to the above exemptions, some ‘dispositions’ are not ‘transfers of value’ for IHT purposes. For example, qualifying gifts for the maintenance of a spouse, civil partner, child, or a dependent relative made by the donor can be treated in this way.

Other exemptions and IHT exceptions These can include (subject to conditions):
gifts to qualifying political parties:

waivers of remuneration or dividends;
transfers of national heritage property;
a reversionary interest under a trust;
trust property which is outside the UK where the trust settlor was not UK domiciled;
if not domiciled in the UK at death, nor resident in the UK, certain foreign currency accounts;
transfers conferring pension benefits;
holdings in an authorised unit trust (AUT) or shares in an open-ended investment company (OEIC) if the holder is domiciled outside the UK; or
interest-free loans payable on demand.

Potential Exemptions (PET)
Gifts to another individual (e.g. adult children) are exempt for IHT purposes if you survive for at least seven years after the gift is made.

Practical Tip:
The above lists are not exhaustive. Proper planning (and professional advice, where necessary) can achieve massive IHT reductions. Your investments, personal and business assets can be sheltered from IHT.