Inheritance Tax (IHT) receipts

Even though IHT receipts represent 0.7% of all HMRC receipts which appears to be a relatively low amount, with the various consultations and reports who know what the next budget might bring. It is worth considering steps to mitigate IHT before the budget and when considering this it is important to ask yourself some fundamental questions, such as:

What should your surviving spouse or civil partner inherit? Often the simple answer is ‘everything’, but then the decisions about wealth distribution are left to the second death, and the intended beneficiaries might lose out.

So, you should be asking yourself who are the intended beneficiaries? Or, are there specific items that you want to leave to particular individuals?

What framework – if any- is needed for your bequests? You might be happy to leave capital outright to a 40-year old son/daughter with a good job, but the same may not be true of a 19-year old student.

Answers to these questions will hep you shape your will and provide you with a structure for your HT planning. It may also prompt you to consider whether making some lifetime gifts is a sensible option.

Certain gifts made during lifetime will be altogether exempt from IHT and so will fall out of your estate as soon as they are made. You can gift up to a total of £3000 each tax year, the annual exemption, without incurring a tax charge. If the exemption wasn’t used in the last tax year it can be carried forward and used in the current tax year, but only once the current year’s exemption has been used.

You can gift up to £250 to as many people as you wish in a tax year. However, this exemption cannot be combined with the annual exemption so that a person receives £3,250 tax free.

The normal expenditure out of income exemption generally can be overlooked as it is considered too complex, but the exemption does not disturb any other exemptions and can be a very useful tool. The income exemption is only available for gifts made from surplus net income taken year on year. It needs to be part of your normal expenditure – which does not necessarily mean regular or annual, although gifts made on a regular basis are more likely to meet the test.

Trusts are, of course, another useful estate planning tool providing you with a mechanism to control when a beneficiary receives the gift and mitigate your IHT. Trusts can be as rigid or as flexible as you would like and can offer a range of tax and non-tax benefits.