In the second of his articles on tax and estate planning, Hilesh Chavda, Private Client Partner at Spencer-West LLP, talks to Lucinda Blythe at The Pedestal on the issues surrounding Inheritance Tax.
The difference between a taxidermist and a tax collector
“What is the difference between a taxidermist and a tax collector? The taxidermist takes only your skin”
Having seen this quote recently, it made me smile. There are more than a few people who share the sentiment given that the headline inheritance tax rate is 40%. At least some of this, I suspect, is due to a misunderstanding of what inheritance tax is and how it works. Previously, I spoke about planning for the future; Inheritance tax is a part of that. With expert advice and a proper understanding of how inheritance tax will apply, you can pass on your assets and plan for how the tax bill will be funded and therefore not feel as though you are being skinned alive.
Tax on inheritance?
Inheritance tax is a misnomer. Yes, it applies to your assets on your death; it can also apply to assets that you pass on during your lifetime.
If you make a gift in your lifetime, there is no immediate charge to inheritance tax. However, if you die within seven years of making that gift, it can be brought into account when calculating your inheritance tax liability. This rule is to stop people making deathbed gifts to reduce their estate shortly before their death.
Inheritance tax also applies to substantive trusts that you create in your lifetime. Transfers of assets in excess of the available nil rate band will be subject to a charge of 20%, a 10 year anniversary charge on the value of the assets above the nil rate band of 6% and exit charges when capital payments are made.
How inheritance tax works
The rate of tax is 40% on the value of your estate when you die. However, there are a number of exemptions and reliefs.
Transfers between spouses and civil partners are exempt. Therefore, there is no inheritance tax to pay on the passing of assets to a surviving spouse or civil partner. Other exemptions include gifts to charity or for national purposes such as a gift of art or furniture to a museum.
Everyone also has a nil rate band which is currently £325,000. This means that the first £325,000 of your taxable estate will be subject to IHT at 0% with the remainder being taxed at 40%. There is also the residence nil rate band of up to £175,000. This is available in full if you leave your home to your children or grandchildren and your estate is valued at less that £2 million.
There are also a number of reliefs that can apply for certain types of assets. The reliefs work to reduce the inheritance tax payable. Relievable assets include business property, agricultural property and woodland.
If you are not domiciled in the UK, there are added considerations as you are only subject to inheritance tax on your UK assets.
Planning
You want to ensure your special possessions, home and the wealth you have accumulated pass to the right people. You also want to ensure they are not burdened with the headache of an unexpected tax bill. Options for planning include having a carefully drafted will, establishing trusts, lifetime gifting and investing in relievable assets.
Planning that takes into consideration who you want to pass on assets to, how your assets will be taxed and how the tax bill will be funded will give you the peace of mind that your beneficiaries are looked after financially.
To paraphrase a trite quote, the only things certain in life are death and taxes. Inheritance tax is inevitable but with an understanding of how it works and an appropriate plan, the taxman can feel more like a taxidermist.
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Hilesh Chavda, Private Client Partner, Spencer-West LLP | + 44 (0)20 7925 8080 | hilesh.chavda@spencer-west.com