First the good news. As many as one-in-four pensioners are now millionaires, according to the Intergenerational Foundation (based on ONS data). And more than half all pensioners have assets topping £500,000.
Now the not-so-good news. Bereaved families face having to pay lots more Inheritance Tax because thresholds have been frozen since 2009 and will remain so until 2028. The IHT nil rate band will stay locked at £325,000.
In 2022, relatives were already £154,400 worse-off compared with 2009 as a result of this fiscal drag. And now – following Jeremy Hunt's Autumn Statement – that gap will widen further still.
You can legitimately minimise Inheritance Tax if you plan ahead. The government and HM Revenue & Customs are surprisingly generous with the various allowances and exemptions. There’s a wide range of concessions – all approved by the taxman.
Many of these concessions involve passing money over to your relatives and other beneficiaries while you’re still alive. It’s all about taking money out of your estate so that it won’t count as an IHT liability.
Or you could get married…
Anything you leave to a spouse or civil partner is exempt from Inheritance Tax. It’s an immediate and effective way to pass your entire estate to someone without them having to pay IHT.
One of the best-known instances of this involved legendary comedian Sir Ken Dodd. Just two days before he died, Sir Ken married his long-term partner Anne Jones. That saved Lady Anne an estimated tax bill of around £2 million.
These deathbed marriages are unusual but are not confined to celebrities. I helped to organise one for a client at Poole Hospital.
But remember – never marry in haste. Marriage is a serious undertaking. The price of getting it wrong can be high.
In certain circumstances, it is possible for a couple to pass on £1 million to their children – with no IHT penalty.
Here’s an example based on a couple. They could be husband and wife – or they could be two people in a civil partnership. We’ll call them Spouse 1 and Spouse 2. There is no IHT on the:
So that’s £1 million free from IHT, simply because Spouse 1 passed their estate to Spouse 2 – enabling the nil rate bands to be carried over to them.
However, the residence nil rate bands do not benefit everyone. There has to be a property in the estate that the deceased owned and occupied at some stage in their life – and it must be passed to their direct descendants (children, stepchildren and any adopted children).
But it would not apply where the property (or residuary estate containing a property) is passed to other beneficiaries. Should part of the property or residuary estate be passed to a beneficiary that is not a direct descendant, then only a percentage of the residence nil rate band would apply.
What if the deceased owned a property before they moved into a care home? What if it were sold to pay their nursing fees? In this instance, they would still be able to apply for a residence nil rate band under downsizing provisions.
But the concession does not extend to more distant relatives such as nephew and nieces. Nor does it include former partners.
If a widow/widower subsequently remarried, the nil rate band from the first deceased spouse could be used.
This means that if your spouse (who was previously widowed) died, there would be two nil rate bands available straight away (£650,000 exempt from IHT).
However, no more than two nil rate bands can be used so you cannot roll over nil rate bands from multiple former marriages!
If you’re wealthy, then you almost certainly have more money than you need. You probably have surplus income piling up, gathering dust in bank or building society accounts somewhere.
The law says that that you can pass surplus income on to others (with no IHT penalties) provided that:
It pays to get legal advice on this because HMRC is not your only concern. Local authorities tend to be very unhappy if they think you’re deliberately impoverishing yourself just to avoid paying care home fees.
There are lots of other little (and not so little) ways of gifting money from your estate without landing the recipients with a tax bill.
And they all add up. Especially if you plan ahead and make full use of them every year. These are some of the gifts that do not incur an IHT liability:
You can give £250 or less per year to any number of individuals. They would incur no IHT liability. And there is no limit on the number of individuals who can benefit from your generosity.
This is great – not just for large families – but for anyone. The recipient of your gift doesn’t have to be a family member of a close friend. It could be anyone…as long as they haven’t already benefited from your £3,000 Annual Exemption.
This is a handy concession if applied to lots of people over a number of years. But you should be careful that no one person benefits from more than one of these exemptions – otherwise the whole gift may become taxable!
You can also give money – with no IHT penalty – to:
PETs enable you to give as much money as you like to anyone you like (and they’ll pay no IHT)…on one condition: you must live for a further seven years after the gift.
But what if you misjudge it? What if you die before the seven years are up? If this instance, the IHT liability would be subject to taper relief:
And again, there is also the issue of care fees to consider. As ever, a local authority is likely to take a very close look at precisely when the money was given away.
If the council feels that the period involved was too short, it will affect your application for care funding.
Trusts used to be a very good way of minimising Inheritance Tax but in recent years the rules have changed in favour of HMRC.
However, Property Trusts can be useful because they ringfence an asset and remove it from the value of an estate.
We often set up property trusts where a testator (the person making the will) has remarried. The trust helps to ensure that the children from the first marriage will still inherit the property. This is important because:
This kind of trust would not save Inheritance Tax but is certainly a good tool in estate planning.
And it also illustrates a crucial point. Trusts should not be set up with the sole objective of reducing a tax liability. HMRC does not like this. Trusts should be set up to serve a practical purpose – as the example above illustrates.
If a trust also reduces your tax liability into the bargain then that’s generally all well and good – but tax minimisation should not be its primary purpose. Never forget…trusts can be contested.
Trusts are not just for the very wealthy. They are just as useful for more modest estates. But trust law is complex so it always pays to get expert advice.
Contact wills and probate solicitor Kerry Hay for expert legal advice on wills, probate, Inheritance Tax planning, powers of attorney, trusts and Court of Protection matters. She is based at our Fleetsbridge office.