Passing on: the good news

Kevin Mackenzie | Supplied

Q How wealthy does someone need to be before they are liable for Inheritance Tax (IHT)?

A Each individual has a nil-rate band of £325,000 plus potentially a residence nil-rate band of £175,000. For a married couple, this could mean a nil-rate band of £650,000 plus a residence nil-rate band of £350,000.A married couple with assets above £1,000,000 will be subject to IHT at a rate of40 per cent.

Q Are personal pensions subject to IHT?

A Not at present. Since pension freedom rules that came into effect in 2015, pensions have been typically free of IHT. However, the newly elected Labour government has proposed that pension death benefits will be included in the estate for IHT purposes from 2027. This proposed change is currently under consultation and we should know more by February next year. Assuming the government proceeds with this, many more people will become liable to IHT.

Q Can gifting to family help with a reduction in IHT?

A Yes. Gifting can be done in a number of ways. Gifts within £3,000 are complete exempt from IHT. If the donor has surplus income, if the gift forms part of normal expenditure out of income and does not affect the donor’s usual standard of living, this too will be immediately exempt.

Gifts above £3,000 and income levels are “potentially” exempt if the donor survives seven years after the gift has been made.

Q Can gifting to charity help reduce IHT?

A Any gift to charity during your lifetime or on death will be immediately exempt from IHT. In addition, if you leave a gift to charity in your Will, if the amount exceeds 10 per cent or more of your estate, the rate at which IHT applies to your remaining estate will be reduced from 40 per cent to 36 per cent.

Q Should I set up a Trust to lessen IHT?

A Trusts are complex and require specialist advice. If you are certain that you will not require access to these funds again, gifting to a Discretionary Trust, or Bare Trust, can also reduce the value of your estate for IHT. Similar to a gift to an individual, the gift will be outside of your estate after seven years. However, be aware of a 14-year rule if further gifting is being made after the gift to Trust.

Gifts to a Discretionary Trust are known as chargeable lifetime transfers, and if the gift exceeds an individual’s nil-rate band of £325,000, an immediate lifetime charge of 20 per cent applies. Whereas a gift to Bare Trust is a potentially exempt transfer.

Kevin Mackenzie is a director at Acumen Family Wealth