The New Tax Year Is Looming – have you got your estate planning in order?
15 March 2018
With the next tax year looming, now is the time to review your Inheritance Tax (IHT) planning strategy.
This tax year has been an especially busy time for Private Client practitioners with the introduction of the residence nil rate band and the registration of trusts initiative being implemented by HMRC. The new tax year will of course, be just as busy, and it is important to review your personal circumstances before this tax year concludes to ensure that you have utilised all available inheritance tax savings.
What is the current Inheritance Tax position?
Under the present law governing inheritance tax any assets passing to the surviving spouse on the first death will have the benefit of a spouse exemption and no inheritance tax will be payable. On the second death a “transferable nil rate band” between spouses is available. This means that if the first spouse to die has not used his or her nil rate band (currently £325,000.00) then it will be available to the estate of the surviving spouse on their death. The value on the nil rate band is uplifted to that date, for example, where a surviving spouse dies during the current tax year and the predeceased spouse has not used their nil rate band the full inheritance tax free amount available is £650,000.00, rather than £325,000.00. Any excess above this amount will be subject to inheritance tax at 40%.
The new main residence nil rate band came into effect on 6 April 2017. This provided for a new nil rate band allowance meaning that each person will have an enhanced inheritance tax free allowance when they leave their main residence to a direct descendant. This main residence nil rate band is being introduced in the following stages:
- £100,000 for deaths in the tax year 2017/18;
- £125,000 for deaths in the tax year 2018/19;
- £150,000 for deaths in the tax year 2019/20; and
- £175,000 for deaths in the tax year 2020/21.
The nil rate band allowance will increase to £450,000 for an individual, in the new tax year, if they are able to use the residence nil rate band allowance. For a married couple their joint nil rate band allowance will be £900,000 for the new tax year.
If your current will includes a trust structure you may benefit from a review of your will to ensure that you are able to avail of the residence nil rate band as direct descendants must inherit directly and not by virtue of a trust structure.
Inheritance Tax Exemptions.
You may also wish to try and reduce the value of your estate this tax year to try and mitigate any inheritance tax liability on your death.
Each individual has an annual exemption of £3,000. This means that each person can gift up to £3,000 per annum without affecting their nil rate band allowance. The annual exemption can be carried forward to the next tax year if it is unused. However, this is limited to one tax year. Now is the time to review your financial position to determine if you wish to make such gifts and utilise your annual exemption.
Should you make gifts in excess of your annual exemption, unless it qualifies as an exempt gift, you will need to survive seven years for the value to fall outside your estate for inheritance tax purposes.
Have you utilised your ISA subscription limit this year? The subscription limit for the current tax year is £20,000 with your being able to add a further £20,000 into an ISA in the next tax year.
It may also be worthwhile speaking with your financial advisor or tax advisor to ensure that you had utilised your Capital Gains Tax allowances on any investments you may have.
Have you recently purchases a property with your partner but you are not yet married? It is important to remember that your partner will not be entitled to your estate in the same way if you were married.
You may wish to consider entering into a will to ensure your partner is adequately provided for should you pass away.
Business Property Relief
Business Property Relief reduces the value of a business or its assets when working out how much inheritance tax is due on an estate. Business Property Relief is available of either 50% or 100% on business assets – a very generous relief provided by HMRC. If you currently own a business are unsure as to the relief available to your business asset you should speak with a tax expert to consider this. It is important to note that not all business can avail of the 100% relief so obtaining clarification on this is important. Some businesses may not be able to avail of the relief it they are not trading businesses.
This tax year has been a very active year for the firm’s corporate department for mergers and acquisitions. For those of you of you who have sold business in the current tax year it is important to note that the net proceeds of sale may no longer be subject to Business Property Relief and as such your estate may be subject to an inheritance tax charge, should something happen to you. There are a number of estate planning options which may assist in mitigating any inheritance tax charges through specific investment options or by utilising the spouse exemption, as defined above, or through use of a trust structure and it is important to obtain advice in respect of such matters.
If you have recently bought a business or own a business now could be the best opportunity for you to review your partnership or shareholder agreement and perhaps think about succession planning for your business should you pass away or loose capacity.
Life continues to get busier and this tax year has not been any different but it is important to set some time aside to consider these important matters. A few minutes of thought and review of matters could help mitigate any inheritance tax charge to your estate.
Our firm’s private client team specialises in providing both estate planning advice and advice around capacity issues. Should this be of interest to you, please contact Neil Bleakley, Fiona Wallace or Stephanie Johnston.