Executors make the necessary decisions
Estates worth more than £2 million on death
Since 6 April 2017, an IHT ‘residence nil-rate band’ is available in addition to the standard nil-rate band. It’s worth up to £150,000 for 2019/20. It starts to be tapered away if your Inheritance Tax estate is worth more than £2 million on death. Unlike the standard nil-rate band, it’s only available for transfers on death. It’s normally available if you leave a residential property that you’ve occupied as your home outright to direct descendants.
It might also apply if you’ve sold your home or downsized from 8 July 2015 onwards. If spouses or registered civil partners don’t use the residence nil-rate band on first death – even if this was before 6 April 2017 – there are transferability options on second death. As a number of conditions apply, it’s best to review your Will and obtain specialist professional advice if you’re hoping to rely on the residence nil-rate band.
Taper relief applies where Inheritance Tax, or additional Inheritance Tax, becomes payable on your death in respect of gifts made during your lifetime. The relief works on a sliding scale. The relief is given against the amount of tax you’d have to pay rather than the value of the gift itself. The value of the gift is set when it’s given, not at the time of death.
HM Revenue & Customs (HMRC) permits you to make a number of small gifts each year without creating an Inheritance Tax liability. Each person has their own allowance, so the amount can be doubled if each spouse or registered civil partner uses their allowances.
You can also make larger gifts, but these are known as ‘Potentially Exempt Transfers’ (PET), and you could have to pay Inheritance Tax on their value if you die within seven years of making them. Any other gifts made during your lifetime which do not qualify as a PET will immediately be chargeable to Inheritance Tax. These are called ‘Chargeable Lifetime Transfers’ (CLT), and an example is a gift into a discretionary trust.
The taxation rules of CLTs are complicated, and you should obtain professional advice if you are considering a CLT. Also, if you make a gift to someone but keep an interest in it, it becomes known as a ‘Gift With Reservation’ and will remain in your estate for Inheritance Tax purposes when you die.
Life insurance policy
If you don’t want to give away your assets while you’re still alive, another option is to take out life cover, which can pay out an amount equal to your estimated Inheritance Tax liability on death. Taking out a life insurance policy written under an appropriate trust could be used towards paying any Inheritance Tax liability.
Under normal circumstances, the payout from a life insurance policy will form part of your legal estate, and it may therefore be subject to Inheritance Tax. By writing a life insurance policy in an appropriate trust, the proceeds from the policy can be paid directly to the beneficiaries rather than to your legal estate and will therefore not be taken into account when Inheritance Tax is calculated. It also means payment to your beneficiaries will probably be quicker, as the money will not go through probate.
The Financial Conduct Authority do not regulate inheritance tax planning.