Blog updated June 2018
As revenue from inheritance tax continues to increase year on year, Sarah Cornish, Partner in Coodes Solicitors’ Wills, Probate and Trusts team, gives her advice on how we can all plan better for the future, ensuring your money goes to the people who matter the most to you after you are gone.
According to HM Revenue and Customs, revenue from inheritance tax from April 2017 to March 2018, was 8.1 per cent higher than in the same period last year. This continues a yearly trend of huge increases to revenue earned through inheritance tax.
Inheritance tax – the tax on your possessions, property and savings after your death – is a growing concern to many people. You probably want to ensure your loved ones benefit from your assets after you have gone. So, while inheritance tax is a reality, what can we do to ensure our money goes to the people who matter most to us in the future?
Remember that there is normally no inheritance tax to pay if the value of your estate is below £325,000. Inheritance tax will also not usually apply if you leave everything to your spouse or civil partner, a charity or a community amateur sports club. It is also worth knowing that if you are married or in a civil partnership and your estate falls under the current threshold, any unused threshold can be added to your spouse or partner’s threshold when he or she dies. This can increase their threshold to £650,000.
In addition, following recent changes to legislation, your individual threshold has now increased to £425,000 if you leave your home to your children, stepchildren or foster children. My colleague wrote about the introduction of what is known as the ‘Residence Nil Rate band’ here.
If your estate is likely to be above the threshold for inheritance tax, it is really worth being aware that you can make what is known as ‘gifts out of income’. My experience is that many people do not know that this is an option. Broadly speaking this means that if you have excess income you can give this away and it is immediately outside of your estate for inheritance tax purposes. However, there are a number of conditions that must be met, so it is important to speak to a lawyer or financial advisor to ensure you are managing this in the right way and keeping appropriate records. One of these conditions is that after making the gifts it must leave you with enough money to sustain your current standard of living. The main difference between gifts out of income and other gifts is that you do not need to survive for any period from the date of the gift for it to fall outside of your estate for inheritance tax purposes.
It is worth taking advice on the exemptions and reliefs you might be eligible for. There is an annual exemption on gifts, for example, which means you can give away £3,000 a year without anyone paying inheritance tax.
For farming families, this is an area that is particularly important. Some farming land, including farm buildings and land used to grow crops, can be passed on – either during your lifetime or after death – without the recipient paying inheritance tax. Again, advice is required so you know what applies in your individual circumstances.
Keep your estate under review to ensure it is still structured in the best possible way. Changes in personal circumstances and changing legislation may mean you need a different approach. Things rarely stay the same for long in life. This is why I advise people to give their estate planning an annual MOT.