We have seen a dramatic spike in enquiries about Wills over the last few months, but despite this, numerous surveys report that approximately 59% of parents either do not have a Will written or have one that is out of date.
It is perhaps more important than ever for everyone to consider getting their affairs in order, rather than potentially leaving a mess behind for their loved ones to resolve.
For most home owners and business owners, there is far more to Estate Planning than merely writing a Will to ensure that their loved ones inherit their Estate; they will need to get to grips with Inheritance Tax (IHT) and structuring the distribution of their Estate appropriately.
Inheritance Tax – Increase in the Nil Rate Band Allowance
Whilst there is no such thing as a popular tax, IHT is undoubtedly one of the most unpopular, with rising calls for it to be abolished altogether.
Whilst no government is likely to completely remove such a well-established, revenue-raising mechanism, recognition of the unpopularity of IHT prompted the 2017 introduction of the residence nil rate band (RNRB).
This allowance beyond the standard nil rate band (NRB) has been gradually increasing the potential value of the Estate a person might leave to their successors tax free. From 6th April 2020, this figure reached the £1million mark, albeit in a very specific set of circumstances.
In simple terms, the IHT payable on your Estate depends upon how much that Estate is worth. This value considers the worth of assets such as property, savings, business interests, shares and pensions, minus any debts or liabilities outstanding at the time of your death.
If the overall value of the Estate is less than £325,000 then there will be no IHT to pay – this is the NRB mentioned earlier. The same applies if everything over and above the £325,000 figure is left to a spouse, civil partner, charity or community amateur sports club.
IHT of 40% will be payable however on anything above this £325,000 figure. The RNRB, an allowance over and above £325,000, is available to anyone leaving a main residence to a direct descendant.
The list of those deemed direct descendants is limited to:
When it was first introduced, the RNRB was worth an extra £125,000 and this has risen in increments until this April, when the figure hit the maximum of £175,000. In future tax years, the amount of RNRB will continue to rise, but only in line with the consumer price index.
The figure of £175,000, combined with £325,000, means an individual can now leave a main residence with a value of £500,000 to a direct descendant. When a person dies and passes their NRB and RNBR allowances directly to their spouse, this creates a combined figure of £1million.
Gift in the present
One way a person can mitigate the amount of IHT payable after death is with the strategic use of gifting throughout their life.
Currently, any gift given to a family member (including shares, property or a valuable artwork, to name a few options) remains free from IHT as long as the gift is genuine, comes with no strings attached and the person making the gift lives for 7 years after making the gift.
One reason people hesitate when considering making non-cash gifts is that the person making the gift may be subject to capital gains tax (CGT), which will have to be paid on any increase in the value of the gift between the time it was acquired and the date the gift is made.
There is a CGT allowance of £12,300, but any gain above this will have to be declared and tax paid on it. Any amount above £12,300 will be added to the gift givers income and taxed at 10% if the overall total is below £43,000 and 20% for higher rate tax payers.
One of the very few silver linings of the COVID-19 pandemic and the economic slump it has precipitated, is that some assets which can be given away have probably dropped in value in recent weeks, and will therefore generate a far lower CGT liability when being given.
The same applies to one aspect of IHT – if the person giving the gift does not live for 7 more years after giving it, then IHT will be due on the value of the gift. The amount of IHT to be paid however will be charged on the basis of the value of the gift on the date it was actually given, meaning that gifts given in the current circumstances are likely to lead to much lower IHT liability than those given when the economy is booming.
At the same time, shares gifted now when the market is depressed, can probably still be relied upon to rise in value as the economy begins to recover in the years ahead, although this will have no impact on the CGT or IHT bill to be paid.
In short, when the fact that some family members might be struggling economically is combined with the IHT benefits to be gained from restructuring an Estate, there has probably never been a better time to give a few carefully chosen gifts.
As with all decisions around making a Will and Estate Planning, good advice from experienced legal professionals is always recommended. Our team here at Ansons is available, albeit remotely at the current time, to help you understand what is possible.
For your peace of mind, speak to Sarah Nash, an Associate Director in our Wills, Probate and Trusts team on 01543 267981 or email her at email@example.com
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