Easter - a time to reflect
Easter is a time when new life is on its way. The ewes are swollen with their lambs, the snow drops have been replaced by daffodils nodding their heads in time with the rain and chilly wind. The delicate white blossom of the hawthorn looks stunning against the blue sky. I uploaded a photo I took because it took my breath away. Everything is fresh and new.
Easter is also a time to remember that Jesus rode into Jerusalem on a donkey. He knew that he would probably not return alive. It was his destiny.
Jesus knew he would be killed, but most of us don’t know how much longer we have. For those wishing to save tax on our death we need to gamble on our longevity. How much to keep for our old age and how much to give to the kids.
The UK form of estate tax is called Inheritance Tax and it is a whopping 40% on what we own with a few exceptions at the time of our death - it is therefore worth planning to avoid where possible.
The threshold for when estates become liable for IHT has been frozen at £325,000 and will remain so until at least 2028. If the threshold had increased annually with inflation since 2017 it would be worth an estimated £458,931 by 2028.
In addition to the nil rate band you can also qualify for an allowance of £175,000 if you pass on your main residence to your children or grandchildren. So the tax free element can be as much as £500,000 before IHT is due.
There are some useful reliefs to play with. The best known is to give wealth to your children more than seven years before you die. If you die within three years of making the gift your estate will pay the full 40% tax rate on the gift. Thereafter there is a sliding scale of tax until after seven years the rate falls to 0%.
The nil rate band and allowance for the home can pass onto the surviving spouse if the assets are passed onto the survivor. This means that on the death of the last to die they get a nil rate band of £650,000 plus an alllowance of £350,000 on the main home.
One useful planning tip is for each couple to leave sums in excess of the nil rate band and the allowance on the main home to the surviving spouse in a trust, where the spouse has a life interest. The Trustees are instructed to pass on the trust assets to the children after the death of the first to die - but take care with the timing there are some peculiar rules. The gift will be treated as being made by the surviving spouse and if that spouse survives seven years then the gifts will have been made tax free.
Of course the Russian Roulette element of this form of tax planning can be insured against but it gets expensive the older you are.
There are other reliefs which can be used which qualify in less time. If you invest in AIM shares or other busnesses which qualify for Business Property Relief. You only need to own them for 2 years before the value in these shares is exempt for inheritance tax - again take care to look at the detail - not all AIM shares or businesses qualify. Jonathan Gain of Stellar our podcast professional of the week specialises in investment which qualify for Business Property Relief for IHT purposes.
Other useful reliefs include an annual gift allowance of £3,000 and any unused amount in a previous year can be rolled over into the next year. So a couple who have made no gifts the previous year can transfer £12,000.
One relief which is often overlooked is gifts out of income. If a parent or grandparent has surplus income to what they need to live on (without reverting to capital to top it up) these gifts are tax free even if made within seven years before death.
The IHT reliefs are extensive and if used well can save a considerable amount of tax - especially for gifts out of income which is unlimited. But a word of warning - make sure that all gifts are properly documented and if you want to rely on the gifts out of income leave sufficient documentation to show that your income remaining was sufficient for you to live on.
Happy Easter.