Questions About Inheritance Tax Planning and Trusts

What is Inheritance Tax?

Inheritance Tax (IHT) is a tax payable on the value of a person’s possessions when they die. It is paid if the value of their possessions (their estate) exceeds their IHT thresholds (also known as nil rate bands) and exemptions.

What is the current IHT threshold?

The current threshold is £325,000 for an individual and £650,000 for a married couple or civil partners. If a person is widowed, it could be £650,000 depending on how much of the allowance was used when their partner passed away. There is also a residence nil rate band which is currently £175,000 per person (all figures for 2023).

How is IHT calculated?

Inheritance tax is currently (2023) calculated at 40% of the value of the possessions over and above the IHT thresholds. The rate may be reduced to 36% if 10% or more of the estate that is above the threshold is left to charity.

Can my Inheritance Tax liability be reduced?

Yes, there are plenty of steps you can take to reduce IHT bills. Tax legislation constantly changes and evolves, and so up-to-date advice is always required to ensure your plans are tailored for your particular circumstances and wishes.

Is Inheritance Tax payable on all of the deceased’s possessions above the thresholds?

No, there are some exemptions from IHT such as bequests to a spouse or a charity.

Who will have to pay my Inheritance Tax bill?

Upon your death, your beneficiaries and executors will have to pay any Inheritance Tax bill. The liability must usually be paid within six months from the date of your death, and failure to settle the bill will result in interest being charged by HM Revenue & Customs. Once the liability has been paid, your executors can apply for a Grant of Probate which will allow them to legally access the rest of your assets.

What is the residence nil rate band?

The residence nil rate band is £175,000. This allowance will only apply if you want to pass your home to a direct descendant like a child or grandchild, therefore not everyone will be able to take advantage of it. When added to your existing threshold, this could potentially give you an overall allowance of £500,000 if you are single or divorced, or £1 million if you are married or in a civil partnership.

Should I delay making plans regarding reducing Inheritance Tax liability?

Act now. If you delay making plans for a number of years, your options could potentially be reduced, and costs could be increased. For example, making a gift to a beneficiary could potentially reduce or eliminate your IHT bill. However, you have to survive a minimum of seven years for this to take full effect, otherwise IHT may be payable on the gift.

Are there any gifts I can give that will be automatically free from IHT?

Certain gifts are automatically exempt, but it depends on who the recipients are. They include transfers between married couples or civil partners, UK registered charities, and various national institutions such as The National Trust, museums and universities. There are also gifts exempt from IHT, which include small gifts - up to the value of £250 in any one tax year – that can be given away to as many people as you wish. An amount of £3,000 is annually exempt each tax year, which can be carried over to the following tax year if not utilised. An exempt gift can also be made in consideration of a wedding - £5,000 to a child, £2,500 to a grandchild or great grandchild and £1,000 to anyone else.

Can I gift my house to my children to reduce Inheritance tax?

There is no straightforward answer to this as there are a number of potential pitfalls. In order to avoid the IHT liability the gift must be made with no strings attached. If the gift has conditions, or you benefit from the home in some way such as continuing to live there, it will be known as a “gift with reservation of benefit” and will remain subject to IHT. There are, however, ways to avoid such a benefit but these are complex and so we would recommend seeking professional advice from us to discuss your particular circumstances.

Do I benefit by giving a gift to charity?

Gifts left to charity are completely free of IHT, and if you leave at least 10% of your net estate to charity, you can reduce the IHT rate on the rest of your estate from 40% to 36%.

What is a Trust?

A Trust is a legal arrangement that allows you to place the ownership of your assets under the control of another person, the “trustee” for the benefit of someone else, the “beneficiaries”.

When would I choose to set up a Trust?

There are a number of possible scenarios; some examples are given below. Call us today to discuss your particular circumstances.

Gifts to an individual may not always be appropriate if the beneficiary is very young, financially irresponsible or at risk from creditors. A well drafted Trust can protect against this.

It may be appropriate to ring-fence property in trust from claims by son-in-law’s or daughters-in-law on divorce.

The beneficiary may be disabled or just unable to manage money, or at risk from losing state benefits if property is given outright.

The use of a trust may be more appropriate where outright gifts to individuals as part of basic Inheritance tax planning would be at risk, and you may prefer to leave the decision-making process to people you can trust.

You may want to take the value of property, and possibly its future development value, outside of your estate without losing control of it. Provided you are prepared to relinquish any benefit from it, a trust will provide a flexible decision-making process to deal with the trust property.

What are the different types of Trust?

Trusts come in many shapes and sizes including Discretionary Trusts, Bare Trusts, Interest in Possession Trusts, Accumulation Trusts, Settlor-Interested Trusts, Disabled Person's Trusts, Non-Resident Trusts and Mixed Trusts. Here is a very brief summary; contact us for a fuller explanation and to discuss your particular circumstances:

Discretionary Trust - one in which the beneficiaries do not have the legal right to demand payment of Trust income or capital (unlike beneficiaries of other types of trusts). Payment is wholly within the discretion of the Trustees, as are the amounts and frequency of the payments.

Bare Trusts - any assets held in a Bare Trust are held in the name of the Trustee, but the beneficiary has the right to all of the capital and income of the Trust at any time, if they’re 18 or over (in England and Wales). This means the assets (e.g. property and/or money) set aside in a Bare Trust will always go directly to the intended beneficiary, once they're old enough.

Interest in Possession Trust - all Trust income must be passed on to the beneficiary as it arises. An example might be if you owned several shares and, in the event of your premature death, wanted to allow your spouse to benefit from the income generated by those shares whilst ensuring that the shares pass on to your children when your spouse passes away.

Accumulation Trust - one where the Trustees can accumulate income within the Trust and add it to the Trust’s capital. As with Discretionary Trusts, they may also be able to pay income out.

Settlor Interested Trust - one where the Settlor, their spouse or a civil partner benefits from the Trust. This term could be applied to an Interest in Possession Trust, an Accumulation Trust or a Discretionary Trust.

Disabled Person's Trust – used to provide special provisions for a disabled beneficiary.

Non-Resident Trust - one where the Trustees don't reside in the UK for Income Tax purposes.

Mixed Trust - a combination of more than one type of Trust.

If you want to ask Vanessa a question in confidence about IHT or Trusts, please use the form below or call 01548 858806.