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Michael Graham discusses the possible changes to inheritance tax.
The difficulty for any legal adviser is that it is only possible to advise a client on the law as it stands at the time the advice is given. Most of the time it is reasonable to expect that legal changes will be evolutionary rather than revolutionary but from time to time governments have decided to implement significant changes. So, what of our current circumstances? It seems to me that further change to the inheritance tax (IHT) regime is almost inevitable.
On the one hand, if the current Conservative government remains in office then we should take note of the Chancellor`s recent comments that inheritance tax is `something which is on his mind`. Whilst complete abolition seems unlikely, we may well see an extension of exemptions and reliefs coming down the line. On the other hand, Labour have demonstrated an intention to go in a very different direction, perhaps by cutting the available allowances, and also indicating that they are considering a `gift tax`. Whatever happens, I suggest that it will be a case of `watch this space`.
Whatever the future may hold it might be worthwhile if I recap on the current position. At present estates are subject to IHT at a rate of 40% if they exceed the `nil rate band` (`NRB`) of £325,000. However, assets which pass to a surviving spouse or civil partner will benefit from a 100% exemption. NRBs are also transferable, so a surviving spouse would have an exemption of up to £650,000 available on their own death at current rates. In addition, there is also a ‘Residence Nil Rate Band’ available to relive IHT on a person’s residence, as long as it passes outright to children or other descendants and this could operate to increase the overall allowances for a married couple to £950,000 in the current tax year. There are other reliefs available for business and farming assets, and gifts to charities and political parties are also normally exempt from IHT.
IHT planning can be complex and professional advice is essential but there are some basic steps that you may wish to consider in order to reduce your potential liability. These include the following:
• Use your annual exemptions. You can gift up to £3,000 in each tax year, free from IHT. There is a separate exemption for small gifts.
• Regular payments out of income may be exempt from IHT. Such gifts can be unlimited in size.
• Gifts made to couples before their marriage or as a wedding gift may be exempt from IHT. A parent of either the bride or groom may give up to £5,000, grandparents and great-grandparents up to £2,500 and other persons up to £1,000.
• Larger gifts may be ‘Potentially Exempt Transfers’ or ‘PETs’. Such gifts will cease to form part of your estate if you survive at least 7 years from the date they are made. It is important to make sure that you do not continue to use the asset gifted in any way as this could amount to a ‘reservation of benefit’ for IHT purposes and would therefore still be included in your estate.
• If you have life insurance or pension arrangements make sure you take appropriate advice in relation to these.
This article has been produced for general information purposes and further advice should be sought from a professional advisor. Please contact our Private Client team at Cleaver Fulton Rankin for further advice or information.