Inheritance tax, also known as estate tax, is a tax imposed by the England and Wales government on the transfer of property or assets from a deceased person to their heirs or beneficiaries. Estate owners in the UK should consider inheritance tax planning to ensure that their assets are distributed according to their wishes and to minimize the tax impact on their heirs.

Inheritance Tax Thresholds

The first step in inheritance tax planning is to understand the tax thresholds in the UK. The tax-free threshold, also known as the nil-rate band, is currently £325,000 per person, or £650,000 for a married couple or registered civil partners. Any estate worth less than this amount will not be subject to inheritance tax. However, for estates that exceed these thresholds, the tax rate is 40%.

Wills and Trusts

A well-drafted will is a crucial tool in inheritance tax planning. A will allows you to specify how your assets will be distributed after your death and can also be used to minimize the impact of inheritance tax on your heirs. One option is to leave your assets to a trust, which provides tax benefits and allows you to ensure that your assets are distributed according to your wishes.

There are several types of trusts that can be used in inheritance tax planning, including:

• Life Interest Trusts: In this type of trust, the beneficiary has the right to the income from the trust for their lifetime but does not have control over the trust assets.
• Discretionary Trusts: In this type of trust, the trustee has discretion over how the trust assets are distributed, and the beneficiary does not have a fixed right to the trust assets.
• Bare Trusts: In this type of trust, the beneficiary has a right to the trust assets and the trustee has a duty to hold the assets for the benefit of the beneficiary.

An estate planner can help you determine which type of trust is right for your situation.

Gifting

In addition to trusts, gifting is another effective way to reduce the impact of inheritance tax. The UK government allows for several types of gifts to be made without incurring inheritance tax, including:

• Annual Exemptions: Each year, you can make gifts up to a certain amount without incurring inheritance tax. The current annual exemption amount is £3,000.
• Small Gifts: You can make small gifts of up to £250 per person per tax year without incurring inheritance tax.
• Wedding Gifts: If you are giving a gift to a close relative on their wedding day, you can make a gift of up to £1,000 without incurring inheritance tax.
• Normal expenditure out of income can be exempted however there are certain criteria that needs to be fulfilled. The gift should be as part of the normal expenditure. The gift is made from the income of individual. The donor keeps enough money to maintain his normal standard of living. The donor should keep the record to of it.

It’s important to note the seven-year gift rule, which states that if you make a gift and die within seven years of making the gift, the gift may be subject to inheritance tax. However, there is a sliding scale of reducing inheritance tax rates, starting from 100% on gifts made in the final year, reducing to 0% on gifts made more than three years before death.

Conclusion

Inheritance tax planning is a crucial consideration for UK estate owners who want to ensure that their assets are distributed according to their wishes and to minimize the impact of inheritance tax on their heirs. Understanding the tax thresholds and using tools such as wills, trusts, and gifting can help minimize the impact of inheritance tax and ensure a smooth transfer of wealth from one generation to the next.

This blog is written by Umar Khan, Senior Estate Planner at Farani Taylor Solicitors.

To get expert legal assistance with Inheritance tax planning, feel free to reach him at ukhan@faranitaylor.com