When we see clients to make Wills, we ask them to do some preparation for us. This preparation includes providing us with a list of assets and their approximate value. It doesn’t need to be a precise science, a quick look on Zoopla, your online banking, and an idea of what you have by way of pensions and other investments or life insurance insurances will do.
Why? So that we can give you a steer on what inheritance tax you may be exposed to (and to also make sure you have all options to hand in terms of planning and protection generally).
When I was in Law School, the Probate exam was always the scariest, it involved a tax calculation. Anyone who knows me will know Maths is my nemesis. It’s surprising now that I do this all the time… but it isn’t easy.
Nil Rate Bands:
Lets start with the Nil Rate Band. A nil rate band, put simply, is the value we are allowed before we get taxed. With inheritance tax, the nil rate band is taxed at 0% and anything over that value is taxed at 40%. This is quite a high rate – for every £100 over the nil rate band, we pay £40 to the tax man (ouch!)
Where inheritance tax is concerned, we each have a nil rate band of £325,000. This is our ‘tax free’ allowance if you like.
If you are married or in a civil partnership, you can ‘double up’ that nil rate band so that you have a total of £650,000 by way of a joint nil rate band to apply to the joint wealth you have together. For lots of us, this will cover the best part of our estate and tax isn’t too much of a worry.
Residence Nil Rate Band:
This is where it can get sticky but I will do my best to explain. In addition to our individual nil rate bands above, there is also a nil rate band which is applied to your main residence. The property must be just that – your main residence (not a rental or holiday home). In addition, you must leave your main residence to your direct lineal descendants (tax man speak for children, grandchildren and great grandchildren). Note this also includes step children and also – adopted children.
The Residence Nil Rate Band is currently £175,000 but it isn’t a ‘flat rate’. The £175,000 is applied against your share of the home. Therefore, if you own a property jointly on a 50/50 basis which is valued at £200,000, you will be able to claim £100,000 of the £175,000 available against your share in your home. If you own a property valued at £350,000 jointly, then you can claim the full £175,000 against your half share in the home.
Are you keeping up?
Therefore, for individuals leaving their home ‘directly’ to their children the nil rate band is potentially £500,000.
Once again, if you are married you may double up this residence nil rate band. This means you have a transferrable residence nil rate band of up to £350,000 which brings your potential joint nil rate band to £1m.
The requirements of the nil rate band are quite strict in terms of how you leave your home in your Will. As such, advice must be taken and your Will drafted carefully to make sure that this nil rate band is available to you.
If you are married or in a civil partnership, anything you leave to each other benefits from the ‘spousal’ exemption which means there is no tax to pay on any gifts you leave one another.
There are also other reliefs, depending on what type of assets you own. For example, Business Relief or Agricultural Relief can apply to business or farming assets which means you can save 50% or 100% of the tax on those items, depending on what they are, and how you are using them. The assets must qualify for these reliefs and a good Will writer (and often – a good accountant) will make sure that you are fully advised and will help you to identify if this will benefit you.
There is also 100% relief on any gifts we make to charity. This is an excellent tool to mitigate tax if done correctly. Additionally if we leave 10% of our net estate to charity, the 40% rate is also reduced to 36% which means that the family could save a significant amount of tax. Again, the gift in the Will must be drafted correctly and with the right wording to maximise the benefit.
We also like clients to tell us about lifetime gifts they have made – for example, if you have helped a family member buy a home.
Why? Because it can impact the inheritance tax nil rate band.
Many clients have heard something about a 7 year rule. If you make a gift and survive 7 years – there is no tax to pay on it. If you don’t survive the 7 year period, depending on when you make the gift a rate of tax will apply.
Lifetime gifting essentially, reduces the nil rate band until you survive 7 years. Careful planning and Will drafting will make sure that the question of ‘who pays that tax’ is considered.
If you would like tailored advice to you, which will include working out your nil rate bands, tax exposure and ensuring that your Wills are tax efficient – please email (email@example.com) or call (01352 860890).
Our initial appointments are without obligation, therefore it doesn’t cost to have that chat.