Getting the Inheritance Tax foundations right

The later you leave it, the more limited your options will be

Successful planning is dependent on getting the foundations right, and it is most effective when it is conducted early. The later you leave it, the more limited your options will be. Current rules mean that the survivor of a marriage or registered civil partnership can benefit from up to double the Inheritance Tax threshold – 650,000 in the current tax year, in addition to the entitlement to the full spouse relief.

Some initial actions that we can help you with and that can be taken to potentially reduce an Inheritance Tax liability and make the process less stressful are:

Writing your existing life policies in an appropriate trust

Life cover will fall into an estate if it is not placed in an appropriate trust, and so 40% of the sum assured could potentially be subject to Inheritance Tax

Leaving your lump sum death benefits from pensions in trust

If you die before age 75, lump sums payable from untouched pension funds are usually tax-free. However, if these are left to the surviving partner, they form part of their estate on death. By pre-arranging for these benefits to be added to a trust, tax can be avoided on the second death.

Using deeds of variation

These allow the recipient of a recent inheritance to vary the deceased’s Will in order to pass money either outright to other people or to a trust. This can be immediately effective in reducing the original beneficiary’s liability on the money they received.

Creating a Lasting Power of Attorney

This gives someone the authority to handle your financial affairs if you are no longer able to manage them yourself. It may never be needed, but if you do not have one and you lose the capacity to make decisions for yourself, it can be costly and complex to administer your affairs through the courts.

Transferring exempt assets

Where assets are transferred between spouses or registered civil partners, they are exempt from Inheritance Tax. This can mean that if, on the death of the first spouse or registered civil partner, they leave all their assets to the survivor, the benefit of the nil rate band to pass on assets to other members of the family (normally the children) tax-free is not used.

Where one party to a marriage or registered civil partnership dies and does not use their nil rate band to make tax-free bequests to other members of the family, the unused amount can be transferred and used by the survivor’s estate on their death. This only applies where the survivor died on or after 9 October 2007.

In effect, spouses and registered civil partners now have a nil rate band that is worth up to double the amount of the nil rate band that applies on the survivor’s death.

Since October 2007, you can transfer any of the unused Inheritance Tax threshold from a late spouse or registered civil partner to the second spouse or civil partner when they die. This can currently increase the Inheritance Tax threshold of the second partner from £325,000 to as much as £650,000, depending on the circumstances.

Transferring the threshold

The threshold can only be transferred on the second death, which must have occurred on or after 9 October 2007 when the rules changed. It doesn’t matter when the first spouse or registered civil partner died, although if it was before 1975, the full nil rate band may not be available to transfer, as the amount of spouse exemption was limited then. There are some situations when the threshold can’t be transferred but these are quite rare.

Calculating the threshold you can transfer

The size of the first estate doesn’t matter. If it was all left to the surviving spouse or registered civil partner, 100% of the nil rate band was unused and you can transfer the full percentage when the second spouse or registered civil partner dies, even if they die at the same time.

It isn’t the unused amount of the first spouse or registered civil partner’s nil rate band that determines what you can transfer to the second spouse or registered civil partner. It’s the unused percentage of the nil rate band that you transfer.

If the deceased made gifts to people in their lifetime that were not exempt, the value of these gifts must first be deducted from the threshold before you can calculate the percentage available to transfer. You may also need to establish whether any of the assets that the first spouse left could have qualified for Business or Property Relief.

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Investment advice will be provided by our sister company ad+ Financial.

The value of your investments can go down as well as up and you may get back less than you invested.

The Financial Conduct Authority does not regulate Tax Advice, Trusts, Cash ISAs and National Savings and Investments.

Thresholds, percentage rates and tax legislation may change in subsequent Finance Acts. Levels and bases of, and reliefs from, taxation are subject to change and their value depends on the individual circumstances of the investor.

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