Inheritance Tax – the elephant in the room?

Inheritance Tax - not pleasant to bump into on the road.

Inheritance Tax – not pleasant to bump into on the road.

Mission workers may not often think about Inheritance Tax, as few of us own vast fortunes.  But we may well be liable to pay it if we inherit a reasonably-sized house from a parent (or even a small one if it’s in London!).  With this in mind we are reproducing this article from our resident tax adviser, Martin Rimmer, to raise attention to this potentially expensive issue which, if not properly addressed, could see family funds going to the UK government instead of supporting mission workers.

 

In April we received the sad news of Ronnie Corbett’s passing. It was reported at the time that prior to his death, Corbett sold his £1.3 million family home in a bid to save his children a ‘six figure’ tax bill. Shortly after Ronnie Corbett’s death a painting by the artist Lucian Freud went on display at the National Gallery in London. It had been donated to the nation in lieu of death duties on the artist’s death.

Both are high profile illustrations of the intricacies of Inheritance Tax. Both Freud and Corbett were legitimately attempting to mitigate the potential tax implications on their estate to their heirs.

Inheritance Tax or IHT is a tax on an individual’s estate that can reach a whopping 40% of everything that is left behind over a threshold of £325,000. It can be arcane and complex to navigate. Expats who think they are not eligible for IHT could be in for a rude surprise, indeed with moves afoot to expand the definition of UK domicile in 2017, Inheritance Tax planning should be on everyone’s agenda.

As is often the case with these things the best tax planning solutions are often the simple ones. There is a raft of straightforward and accepted means by which IHT can be reduced and each will depend on individual circumstances.

The first consideration in planning for IHT is the ‘nil rate band’. If that person was married or had a civil partner the relevant provision allows claims for all or part of an unused nil rate band, up to £325,000 on the death of a spouse or a civil partner to be transferred to a surviving spouse.

From 2017, an additional nil-rate band of £100,000 will be available when a home is passed on death to a direct descendant.   From 2018, the additional nil-rate band will increase by £25,000 per year, up to £175,000 in the year 2020. The main residence nil-rate band will be transferable where the second spouse or civil partner of a couple dies on or after 6 April 2017 irrespective of when the first of the couple died.

‘Gifting’ is another popular means of managing inheritance. If during your lifetime you give something to a friend or a family member, who is not your spouse or civil partner, and you no longer enjoy any benefit from it, the value of the gift will fall out of your estate. That is if you survive the gift by seven years. Sadly for Ronnie Corbett this was not the case.

Anything you leave to a UK or EEA charity is also free of Inheritance Tax.  If you leave at least 10% of your estate to charity, it will reduce the rate at which Inheritance Tax is calculated to 36% rather than 40%. And life insurance policies are available to cover future IHT liabilities.  This measure won’t reduce the amount of Inheritance Tax due, but the insurance proceeds will make it easier for the surviving family to pay the bill.

The reality is that IHT is complicated but important. The biggest obstacle to discussing IHT can be the embarrassment or perceived intrusion of raising inheritance with family members. But in reality, confronting the elephant in the room and planning now can be the difference between passing wealth to loved ones that will support them in the future and leaving a sizeable chunk of tax affairs to sort out.

This article was reproduced by kind permission of The Fry Group, providers of international tax advice.