The unpleasant reality of inheritance tax in the UK has been around a while and no longer comes as a surprise to most. Useful snippets of information can help clarify the tax’s implications, as well as identify a few legal routes to minimise what gets paid over upon inheritance, writes Thomas Hughes.
To this end, estate planning becomes valuable no matter how big or small the estate in question. The British inheritance tax rate stands at 40 percent, and this applies to the whole estate. Foreigners are subject to the same rate, and also enjoy the same exemptions and allowances, where applicable. An estate typically “pays” the inheritance taxes from the estate itself, via the executor. Beneficiaries aren’t liable to pay from their own reserves, unless the estate has insufficient funds of its own.
Importantly, where the estate is deemed exempt based on its total value, beneficiaries might become liable for income or capital gains tax, if they generate an income from inherited assets in the years following an inheritance.
THERE IS TYPICALLY NO TAX TO PAY ON AN INHERITANCE IF:
• An estate’s value is less than £325,000
• Everything above the £325,000 threshold is bequeathed to a spouse (including a civil partner), a community (amateur) sports club, or a registered charity
• A person leaving a house to his or her children, stepchildren or grandchildren enjoys a higher threshold of £450,000.
• If a person is married or in a civil union, and bequeaths a minor estate below the threshold upon his or her death, the unused amount to the legal threshold can be added to the partner’s threshold, raising it as high as £900,000 in some cases.
• The 40 percent tax only applies to the value above the £325,000 threshold. An estate can pay a reduced inheritance tax rate of 36 percent if 10 percent or more of the net value is bequeathed to charity, which at times makes for substantial savings.
IMPORTANT INHERITANCE TAX EXEMPTIONS
Some gifts given while an estate owner is alive can attract taxation, if the owner dies within seven years of the donation. Something called taper relief can apply with the increasing passage of time, meaning if inheritance tax ends up being levied under these circumstances, it will be less than the 40 percent flat rate. Business Relief, as defined by the legislation, also allows for some assets to be bequeathed without attracting inheritance taxes. Where an estate encompasses farm or woodlands, something called Agricultural Relief also applies, and reduces the tax liability.
BREXIT AND ESTATE PLANNING: NOW IS BETTER THAN LATER
Inheritance tax legislation is seldom retroactive, and current taxation parameters are possibly more beneficial than the potential for government adjustment to solidify the fiscus post-Brexit. Smart citizens will ensure estate structures are optimised to minimise an estate’s legal value, taking advantage of holdings structures that either attract a lower tax rate, or offset the flat rate along the routes outlined above. EG