People were fearing that IHT may be on our Government’s agenda for an upwards-review given the huge amount of money it is having to spend to support the economy in these times. Capital Gains Tax likewise was likely to be the subject of significant review this year but so far (and in the March 2021 Budget) we have not seen any drastic changes on either account. However, we must not discount the possibility of HMRC and Government tightening of the IHT rules and other taxation changes.
Generally, IHT applies on death to assets within an estate that exceeding £325,000 per person on death. The rate continues to be 40% on the value exceeding £325,000. Spouse-to-spouse gift transfers on death remain IHT free. For married couples, the allowance can increase to £650,000, depending on their circumstances.
A relatively recent change to IHT was the introduction of the Residence-Nil-Rate-Band (RNRB). This potentially increases the IHT reliefs for couples passing estate ultimately to children. The introduction of the relief was staggered up to coming year and now the maximum relief is available such that full IHT relief of £1m can be available for a married couple with children.
There are limitations to the RNRB. It is available for married couples or civil partners who own assets below £2m in value comprising a property asset and who also pass their estates to each other (as gifts or life interests) and then directly to descendants (children/grandchildren etc). It remains unclear how politically popular the RNRB will continue to be. It is a limited relief (it does not apply to everyone). It is relatively complex to claim (but we can do so). Our advice is that Wills and trusts should have the provisions within them to be able to claim the RNRB allowance when needed and available.
Charities
Gifts in Wills to registered UK charities are exempt from IHT. Also, it is worth mentioning that the standard 40% IHT rate on remaining assets can be reduced to 36% provided that 10% of net estate is left to registered charities. If you are intending to leave money or estate to charity, then consider giving 10% of your estate if it would otherwise be subject to IHT. If you have gifts to charity, consider a flexible Charitable Trust for a better structure. We will be happy to explain this and the reasons.
“7-Year” Rule
The current rule is that if you give away assets while you are alive, once 7 years has passed HMRC considers it released from your Estate for IHT calculation purposes. A person can give away £3,000 in total in any given year without it impacting the 7-year rule and can make other small gifts for birthdays, marriages etc and gifts to registered charities are also exempt. A gift must be absolute. You are not allowed to ‘gift’ monies or an asset but retain a benefit in them as this may be deemed a ‘Reservation of Benefit’ by HMRC. There are various other rules and provisions relating to the 7-year Rule which will be happy to explain further.
The ‘7-year Rule’ remains current law but Government are reviewing this and may reduce it to 5 years. This is for practical reasons – it can be difficult to obtain bank statements and evidence of gifts going as far back as 7 years and HMRC may decide it is easier to reduce the period to ensure a bigger uptake from clients in terms of disclosure and compliance.
If you are considering making any substantial ‘gift’ to children or grandchildren, we advise you to consider the effect on the receiving beneficiary and for their own Estate (in terms of their own IHT position, divorce protection etc). Often, best protection is made using a Discretionary Trust structure, enabling the 7 year rule also to be utilised.
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