Avoiding the ‘death tax’: Financial planning in life could help reduce the risk of your loved ones losing out


Financial advisers and tax specialists are hoping inheritance tax (IHT) allowances will be increased as well as simplified

Friday, 31st January 2020, 7:00 am

Updated Friday, 31st January 2020, 7:01 am
Rules may change in the Budget but experts advise starting to plan now (Photo: Chris Radburn/PA Wire)

Financial advisers and tax specialists are hoping inheritance tax (IHT) allowances will be increased as well as simplified when the Budget takes place on 11 March.

Baby boomers, those in their sixties and seventies, hold more than a third of the UK’s household wealth; a total of £14.6trn, according to the Office for National Statistics (ONS).

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Shona Lowe, private client and corporate director at financial adviser 1825, says it’s not surprising savers in this age group help younger relatives. But by doing so, they may risk passing on an IHT bill, a 40 per cent tax often dubbed the “death tax”.

How not to inherit a big bill

IHT is payable when the original owner of the cash, or asset, dies. How much – or even if it is paid – depends on how much is given and when.

It also depends on whether a will is made, as even married couples need to make one to benefit from some of the IHT-free allowances.

Famously, comedian Rik Mayall’s wife had to pay inheritance tax because the couple didn’t make a will.

Rik Mayall and his wife did not make a will (Photo: Steve Finn/Getty)

Small amounts of money will not attract HMRC’s radar so long as the grandparent can afford to give them. Kay Ingram, director of public policy at adviser firm LEBC, says: “This is known as the gifts out of normal expenditure exemption and has proved useful to the ‘Bank of Mum and Dad’ providing regular support with mortgage or education costs.”

However, Ms Ingram points out that this may be subject to change in the Budget next month.

A grandparent is allowed to give away up to £3,000 a year per person, and a further £2,500 in the tax year that a grandchild gets married.

Ms Lowe says grandparents each have an allowance and can even use a previous year’s allowance. “Grandparents who are new to gifting can gift £12,000.” Anything above this is subject to a seven-year test.

An estate valued below £325,000 is not subject to any inheritance tax, also known as the nil rate band (NRB). But there is an extra £175,000 available if the relative wants to pass on their main home of residence, and this is called the residential nil rate band or RNRB.

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Helen Salisbury, a partner and solicitor in the probate team at Nelsons, says a home up to the value of £175,000 can be inherited by children, grandchildren, adopted children, stepchildren and foster children.

This allowance has slowly been rising and brings the maximum total tax-free allowance to £475,000.

Together, a married couple will be able to use their joint allowances to pass on £950,000, rising to £1m after 6 April 2020.

Start young

Start planning early by giving small and regular amounts away, if you can afford to. Grandparents could open a bank account for grandchildren. All you need is a birth certificate. Any money paid in will be out of your estate for IHT straight away if it falls within one of the exemptions, and the interest earned will not be yours for tax purposes.

Other options are a Junior Isa or even a pension.

Grandparents can pay as much as £4,368 into a Junior Isa, although the money isn’t accessible until the child is 18.

Or up to £2,880 per year can be put into the pension of someone under the age of 18.

Once the money is paid in, the pension provider claims back £720 tax relief from the Government. So that £2,880 is worth £3,600.

Case study: The sibling

Peter faced having to leave his home after the deaths of his siblings

Peter Jackson, 61: From Surrey

“I lived with my brother and sister. We bought our house together. We all lived together and it worked well – none of us were married or had children.

“We owned equal shares in it. Then my older brother John died 10 years ago, he left everything to the two of us. At that time, the property wasn’t worth so much so we didn’t have to pay inheritance tax.

“Then my sister Mary died. She left her share to our nieces and nephews. The thing is, I didn’t have enough savings to buy her out nor to pay the inheritance tax. So I nearly lost my home.

“Thankfully, the executor of Mary’s will got our 10 nephews and nieces to agree to a deed of variation, so that I inherited the house from Mary and they inherit it when I die. Fortunately, no one objected.

“Now I know that I am able to live here for the rest of my life.”

In grandparents we trust

Some grandparents might feel more comfortable setting up a trust. For this you need to see a specialist tax adviser. “Trusts can help you protect money, maintain some control and are often a key part of an overall inheritance planning exercise,” says Ms Lowe.

She adds: “You decide how much you want to put in the trust, who you want to make decisions about what’s in the trust and who you want to benefit.

“There are lots of different types of trust that each come with their own tax rules so it’s best to consult a specialist to ensure you choose the one that best suits your and your grandchild’s future needs.”

‘Grandparents who are new to gifting can gift £12,000’

Do your paperwork

Make sure your will is up to date, as this will ensure you pass on as much as possible to the people you want in the way you want. Nathan Scott, a tax partner at Haines Watts in Newcastle, points out that even married couples need to make a will.

“Transfers between spouses and/or civil partners are exempt from inheritance tax. In the correct circumstances, this can offer an efficient and low-risk inheritance tax planning strategy. By leaving the entire estate to a spouse or civil partner, you can ensure no inheritance tax is payable when you pass away.”

Change may be coming

Siblings who co-habit may be given the same rights as married couples and those in a civil partnership if a Bill currently going through the House of Lords is made law.

Ms Ingram says a Bill sponsored by Lord Lexden is seeking to give cohabiting siblings similar rights to inheritance tax-exempt transfers of assets that currently only applies to married couples and civil partners.

She says: “House price inflation outpacing wage growth has seen an increase in siblings who club together to buy their first home, or in later life, live together for support and companionship. The Bill seeks to recognise such relationships and provide exemption from inheritance tax, where the siblings are over age 30 and have cohabited for at least seven years prior to death.”



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