Inheritance tax - what's the benefit of gifts, trusts and charity?

When someone dies, their assets (known as their estate) worth over £325,000 are liable for inheritance tax at a rate of 40%. This is the standard nil rate band and there is also a residence nil rate band which can make a higher proportion of the estate exempt from tax.

UPDATE: We have now written an updated version of this article, which you can read here.

However, not everyone will want to rely on the standard nil rate band and residence nil rate bands when they die, or they might not be eligible because of the makeup or size of their estate.

Life time gifts

Making lifetime gifts is often a feasible and simple option to reduce your estate for inheritance tax purposes.

Julie Frampton, Wills & Tax Executive, explains, “You can make a gift of assets you own to family members or friends. From the date of the gift you can no longer enjoy any benefit from what you have given away and after seven years the value of the gift is no longer included in your estate for inheritance tax purposes.”

For example, if you give your child some money, and you live for a further seven years, it will not be taken into account when calculating the inheritance tax liability when you die. If the seven-year rule is an issue, you can give away up to £3,000 per tax year without it applying, and you can give away money to your children and grandchildren when they get married. Small gifts up to £250 are also possible each year, but the most generous gifts that can be made without the seven-year rule applying are those out of surplus income. All of these rules are complicated and it is best to take legal advice.

Trusts

Trusts are always a flexible option for making gifts, particularly if you want to control the assets after the date of the gift. The seven-year rule still applies though, and to save inheritance tax, the creator of the trust cannot benefit from the assets put into it and nor can his spouse/civil partner.

There are investment options available also, that will help reduce your inheritance tax liability, by making use of agricultural or business property relief exemptions in the legislation. These will, more often than not, require regulated advice from an independent financial adviser.

Leaving money to a charity

Money left to a charity is also free of inheritance tax and if, when you die, you leave 10% or more of your estate to charity, it will reduce the inheritance tax rate on the rest of your estate from 40% to 36%.

Other options?

If making gifts does not appeal then the simplest solution, other than doing nothing, might be to insure against the liability by taking out a life assurance policy where the proceeds are not payable to your estate, but payable to your beneficiaries under a trust. They can then use the money generated to fund the tax liability. The policy must be written in trust, so that it does not add to the estate, otherwise it will simply add to the tax problem!

Our Wills & Tax Team, based in Christchurch, also cover Bournemouth, Poole and the New Forest. If you have any questions, you only have to ask us at Frettens. Please call 01202 499255 and Julie or a member of the team will be happy to discuss any questions that you may have.