Estate planning is all about ensuring that the right people get the right financial assets and/or financial assistance at the right time. Losing family wealth to inheritance tax or hostile creditors can have a significant negative impact on your wider wealth-planning objectives.
It is common for married couples and civil partners to put off comprehensive estate planning until the death of the first partner. This simply defers the problem to a time when making important financial decisions may be more difficult.
The current inheritance tax (IHT) regime is relatively benign, with many legitimate and well‑established planning opportunities available to those who wish to reduce or avoid an IHT bill. However, with government finances under severe strain, it is unlikely the IHT regime will avoid change. Since dead people cannot vote, the temptation for future governments to tinker with the existing legislation is likely to be hard to resist.
Currently, IHT at a rate of 40 per cent is applied on the death of UK domiciled and – potentially – non-UK-domiciled individuals on most types of wealth above a certain level.
A number of exemptions and allowances can be utilised to reduce the value of your estate and therefore the amount of IHT due. The main ones are laid out below.
• There is an exempt estate amount (often referred to as the ‘nil‑rate band’), which is £325,000 per person.
• Property owners are entitled to an extra £175,000 exemption on a sliding timescale (although full implementation of this exemption has been deferred until April 2020).
• For non-UK-domiciled individuals, IHT only applies to their UK assets. The tax rate is currently 40 per cent on all non-exempt assets above £325,000, including chargeable gifts made within the last seven years. The tax treatment of non-UK domiciles is currently under review, with the period of UK residence after which an individual is deemed to be UK-domiciled for IHT purposes set to reduce from 17 to 15 years from April 2017.
• Transfers of any amount between UK-domiciled spouses and civil partners, whether in lifetime or on death, are exempt from IHT (they are limited to £325,000 when the recipient is non-UK-domiciled).
• A non-UK-domiciled spouse or civil partner with a UK-domiciled spouse or civil partner (or their legal personal representatives within two years of their death) may make an irrevocable election to be treated as UK-domiciled for IHT purposes only. This will then apply to the previous seven years. The election will cease to apply if the individual ceases to be tax resident in the UK for at least four successive tax years after the election.
• Married couples and civil partners may carry forward their deceased spouse or civil partner’s unused nil-rate band, with the amount of the nil-rate band determined by the exemption applicable at the time of the second partner’s death.
• An annual gift of £3,000 is immediately exempt, as is £3,000 from the previous tax year, if it was not used.
• An annual gift allowance of £250 to any number of individuals is immediately exempt, provided that the recipient does not also receive part of the £3,000 annual gift exemption.