Too Good to Deny Future Generations
In the first article in ther series, Steve Pitts, Partner at Thursfields LLP, the Worcestershire-based solicitors, discussed Wills in detail.
Part of putting your affairs in order is to take the opportunity to use your Will for Tax Planning and here we are meaning Inheritance Tax (IHT) planning. This IHT planning can be both during your lifetime and on your death. IHT is a complex tax and so this article is no substitute for advice when looking at your own affairs in detail.
Some simpler IHT points:-
- Each individual has a Nil Rate Band (NRB) for IHT, currently of £325,000 – so if you die leaving an estate under the NRB there is no IHT to pay – the NRB will not increase until after the 2015 General Election, at the earliest.
- There is no IHT on gifts to spouses or civil partners (regardless of size).
- A married couple or civil partners have between them two NRBs so between them they can leave up to £650,000 without IHT being payable – the unused part of the NRB for the spouse or civil partner who died first can be transferred to the surviving spouse or civil partner’s estate to be used there.
- IHT if payable is at the rate of 40% from your estate.
- You can give away up to a total of £3,000 in any one income tax year (the annual exemption this is called).
- If you have not used the annual exemption in a tax year you can carry it forward one tax year.
- Gifts larger than £3,000 are exempt from IHT if you survive more than seven years – these gifts are called Potentially Exempt Transfers (or PETs for short).
- Gifts to charity are free of IHT – whether on gifts in your lifetime or gifts from your estate.
- IHT is calculated on the open market value of all of your assets less your debts.
- There are special IHT reliefs for business assets or agricultural assets.
- There are complex IHT rules relating to trusts.
- The anti-avoidance provisions for IHT are many and are generally complex.
- IHT is based on a person’s domicile rather than place of residence (Income Tax, by contrast, has a different test).
- From the 6th of April 2012 if you leave more than 10% of your estate (by cash gifts or legacies, or as a share of residue) in your Will to charity, which includes the Seven Valley Railway Chartable Trust (SVR CT), and this can be gifts to more than one charity, then the rate of IHT will be reduced from 40% to 36%. This relief will only apply if 10% of the net estate is given to charity. The net estate is what is left after all IHT exemptions, reliefs and the NRB, as well as any liabilities outstanding at the date of death, have been deducted from the gross estate. This is only of benefit if your estate is liable to IHT.
IHT is simpler to follow in a series of examples.
Say a widow dies leaving assets of £950,000 after paying her debts and in her Will leaves her whole estate to her children. So let us assume she has her own NRB of £325,000 to set against this and her late husband’s NRB of £325,000 too. IHT is payable on £300,000 (£950,000 less £650,000) at 40%, so £120,000 IHT is due.
- Her children receive £830,000 after IHT (£950,000 less £120,000)
- HMRC get £120,000 IHT
Same facts as Example A but this time there is a legacy of £50,000 to the SVR CT before everything else goes to the children. This time IHT is payable only on £250,000 at 40% (as the gift to SVR CT is IHT free) and so the IHT this time is £100,000.
- Her children receive this time £800,000 after IHT and the legacy (£950,000 less £100,000 less £50,000)
- The SVR CT receive £50,000
- HMRC get £100,000 IHT
Same facts as Example A but this time there is a legacy of £100,000 to the SVR CT before everything else goes to the children. As this time the gift to the SVR CT is more than 10% of the estate then the rate of IHT is reduced from 40% to 36%. This time IHT is payable only on £200,000 at 36% and so the IHT this time is £72,000.
- Her children receive this time £778,000 after IHT and the legacy (£950,000 less £72,000 less £100,000)
- The SVR CT receive £100,000
- HMRC get £72,000 IHT
Providing for your loved ones is the most important thing to consider when writing a Will and undertaking IHT planning; however, once they have been considered you may wish to leave a gift in your Will to support the work of the Severn Valley Railway. One way of doing this is to include a residuary legacy to the Severn Valley Railway Charitable Trust. As can be seen from the examples, as above, the effect of such a charitable gift to the SVR CT can be substantial whilst still leaving a considerable amount to your family.
> Part Three