That won’t be an issue, will it?
We know that it won’t happen to us, of course. But let’s assume that your next door neighbours both have concerns and they want to cover off a few points with you.
The neighbours, Bob and Alice both like, and trust you. They appreciate the time and effort that you spend keeping up to date with things, particularly as you’re one of the executors of their wills. Your investigations to date have established that IHT (Inheritance Tax) may have to be paid if the estate is worth more than £325,000. This is known as the ‘nil rate band’ allowance. Anything over this amount (that doesn’t have any exemptions) will be taxed at a rate of 40%.
As they are married/ in a civil partnership, there’s no Inheritance Tax on any assets which they pass to each other (even if these total more than £325,000) and their nil rate band allowance will also transfer to the survivor. This means that, when the survivor dies, Inheritance Tax won’t be payable unless the estate is worth more than £650,000 (2016/17).
There won’t be any IHT to pay on gifts made to charities, and if 10% or more of the estate is given to charity, the tax payable on the remainder of the estate will reduce to 36%.
As Essex residents and animal lovers, Bob and Alice both appreciate that you have taken the time and trouble to investigate some of the options. The Barking dogs trust will benefit under the current rules.
You’ve pointed out to Bob and Alice that there are certain gifts which could be made that will be free from Inheritance Tax and others that won’t be. For example, they could each donate up to £3,000 a year (annual gift allowance) without having to pay Inheritance Tax.
You have also outlined how a PET could be useful, with a caveat that they can become chargeable if the donor dies within the 7 year period (a failed PET).
Gifts such as property will only be free of Inheritance Tax ( as potentially exempt transfers) if the donor died seven years or more after making the gift and as long as they didn’t benefit from it (for example, continuing to live in the family home after putting it into a trust)
Gifts to a registered charity, such as the dogs trust or a political party would be 100% exempt from tax. The charities currently receive substantially more than all of the entire political parties combined.
Bob and Alice don’t have children, but they plan to give wedding gifts when appropriate, of £1000 to their nieces and nephews. They already give each of them £250 birthday money so a bit more wouldn’t hurt. They could also give away another £3000 each year if they found a deserving cause/relative (not the nieces and nephews, they get enough already). The mortgage is paid off, and both Bob and Alice are in receipt of good pensions. They have more than enough to live off so they could afford to make a regular gift out of income. Again, this may not be subject to IHT.
From April 2017 the Government has introduced a new, additional (IHT) allowance for people who own a home called the “family home allowance”.This is currently £175,000.
It will increase in line with Consumer Prices Index (CPI) from 2021 to 2022 onward. Any unused nil-rate band will be able to be transferred to a surviving spouse or civil partner.
From now the £325,000 exemption that everyone gets,when added to the new family home allowance means an increase in the IHT threshold to property owners of £500,000 – or £1m for married couples.
To qualify for the family home allowance, the property must have been the main home at some point and must be left to one or more direct descendants. This includes children, stepchildren, adopted children and foster children, and grandchildren, but not other relatives such as a nieces and nephews.
This won’t affect everyone, including Bob and Alice as they don’t have children.
After hearing how complex this is likely to be and potentially difficult to work in reality, both are duly relieved.
Bob and Alice don’t currently run a business as they are both retired, but had they been in this position when one passed on, they may have been eligible to claim business property relief (50% or 100% on certain assets) Bob’s Aunt runs a farm and believes that certain assets may qualify for IHT relief.
Both of these situations will require appropriate advice if they want to minimise the potential tax payable and they will factor this into their plans when making a will.