Don't Leave It All To The Taxman
18 Jan 2019
At 40% of everything you own in excess of the £325,000 allowance, it's no surprise inheritance tax (IHT) is one of the UK's most hated taxes.
While the introduction of the main residence nil rate band (MRNRB) this April will boost the tax-free allowance, it's not without a whole load of catches.
The MRNRB gives you an additional £100,000 allowance this tax year, increasing by £25,000 each year until it reaches £175,000 in 2020/21, after which it will rise in line with inflation.
This means that, by 2020/21, it will be possible to leave your loved ones £500,000 without them having to pay a penny in IHT. What's more, as both the standard nil-rate band allowance and the MRNRB are transferable between married couples and civil partners, a couple could pass on £1m IHT-free.
Watch out for the catches
But, it's not quite as simple as it sounds. The MRNRB only applies to your main residence, which is usually your home. Therefore, if your home's value is only £95,000, you won't be able to use the full value of the MRNRB.
If you're wealthier you won't necessarily get it either. If the value of your estate (that's everything you own in layman's terms) exceeds £2m, the MRNRB is tapered away at the rate of £1 for every £2 above this. For example, someone with an estate worth £2,200,000 would lose £100,000 ofthe allowance.
Another condition is that you must leave it to direct descendants such as your children or grandchildren, which can include adopted, foster and step-kids. Leave it to someone else and they won't be able to use the additional allowance at all. If you do want to use the additional allowance, and it suits your wishes, make sure your will reflects this.
Reduce a future bill
Whether or not you're going to be able to take advantage of the MRNRB, it's sensible to be IHT planning savvy. Leave an estate larger than the value of the allowances and, with the taxman taking 40% of any excess, you've inadvertently made him one of your key beneficiaries.
Thankfully, a bit of forward planning can prevent this. Although it takes seven years for a gift to be considered outside your estate for IHT purposes, there are a number of exempt gifts you can use to shrink your estate instantly.
These include an annual exemption of £3,000; as many gifts of up to £250 per person as you like; and a wedding gift allowance of up to £5,000 for a parent, £2,500 for grandparents and £1,000 for everyone else.
There are also exempt recipients. These include charities, universities and political parties but also your husband, wife or civil partner.
Time for trust
It's also important you don't inadvertently add to the problem. Ensuring your life insurance is written in trust means it's paid outside your estate so it won't be liable to IHT. Doing this also means it bypasses probate so the proceeds will be available quickly and without the need for further paperwork.
It's easy and free to put your life insurance in trust. Your insurer or broker can supply the forms when you take out a policy and, if you've already taken one out, many policies can be transferred into trust.