A guide to inheritance tax

At Ellis & Co. we support our clients to manage their assets in a tax efficient way. An area of tax that can present the biggest tax exposure is often the one that is least thought about. This of course being inheritance tax; charged at a rate of 40%, the tax payable could be huge.

For many years there have been whispers of total reform, and more recently of total abolition. So far these rumours have not led to significant changes. We would be surprised to see this tax abolished, particularly as HMRC have made moves in recent years to catch more offshore matters within the inheritance tax net. These are not the actions of a government soon to abolish the whole thing, so unfortunately, we expect this tax to stay.

Recent developments in inheritance tax

The latest development relevant to most was back in 2017 when we saw the introduction of the Residence Nil Rate Band (an extra tax-free value that could be passed on without an inheritance tax charge). Changes prior to this came in 2009/10 when the nil rate band was uplifted to become £325,000, the level at which it still stands despite the passing of 13 years’ worth of inflation. It is set to remain at this level until 2028.

The availability of the Residence Nil Rate Band (up to £175,000) and the ordinary Nil Rate Band (up to £325,000) are the foundation of the inheritance tax landscape. Combined they mean that an individual could, in theory, pass on £500,000 of assets without their Estate incurring an inheritance tax charge.

In 2007 we saw the introduction of the ability to use a deceased spouse’s bands, if they had not used them on their own death. This means that up to £1M of assets could pass on without the Estate incurring an inheritance tax charge. Naturally, however, things are never as straight forward as they appear. At Ellis & Co. we help our clients navigate the complexities and highlight nuances that they may not have been aware of.

When HMRC write the rules they often have the nuclear family in mind, a concept growing less commonplace. For example, the Residence Nil Rate Band was a welcome addition, however, it only applies when passing a home to direct linear descendants. This excludes renters, low property values areas, people without children passing wealth to siblings/nephews and nieces, blended family arrangements and many others, and is somewhat discriminatory by concept.

Reform would be welcome, and we are interested about what shape that might take.

Misconceptions and common issues

An effective way to reduce the value of your wealth on your death is to have given it away before your death. The obvious problem here is the uncertainty of when this might be!

Give it away too late and you could fall foul of the 7-year rule, give it away too early and you may deplete what remains. Give it away far too early and you may burden your inheritance recipients with too much wealth and exposure to failing relationships resulting in loss outside the family line. For the team and I at Ellis & Co. your family circumstance and personal preferences always take a high priority in the planning process. We can also explore whether Trusts would be an appropriate balance of control and gifting and help navigate what it all means.

We often encounter situations where someone, having some knowledge of inheritance tax, has transferred the ownership of their own home to an adult child. They knew enough about inheritance tax to give away some wealth, but not enough to have been aware of the ‘Gift with Reservation of Benefit’ rules. These rules catch out the well-meaning but unaware. The Gift with Reservation of Benefit rules state that if you give a ‘thing’ away then you can no longer have the benefit of that ‘thing’. If you do retain a benefit of the ‘thing’ then it is still regarded as being yours when it comes to assessing your Estate.

Another area that we frequently encounter is that no Wills have been written, or the Wills are old and were written before the introduction of the transferrable nil rate bands, often involving the first spouse passing their half of value to a Trust rather than to their surviving spouse. This was commonplace before the introduction of the transferable nil rate band, but for many people it is now nothing more than a redundant complexity.

It is worth taking stock of your overall position every 10 years or so to ensure that you are doing what you can to mitigate any potential inheritance tax exposure.

If you would like to discuss your position with Ellis & Co. please get in touch on 01244 343504.