Let us take a quick look at inheritance tax, through some family lifestyle transactions:
1. Everyone is tempted to ignore inheritance tax (IHT) because it centres on one’s death. The first issue for all parents (especially if the children are now adults) is to write a Will. Just grasp this nettle and do it, soon, as this might save a lot of family ructions; you can always amend it a year or two later. Make sure you clearly deal with emotional issues such as executors, valuable chattels and family jewellery!
2. The best IHT tactic is to spend annually more than you are gaining/earning annually. Slowly giving away assets once you are over 65 or 70 years of age makes sense, providing you do not deprive yourself of future necessary capital or income. This is difficult to judge; thus many UK adults procrastinate, disposing of substantial funds only at the last moment. Regular gifting annually (e.g. on birthdays or anniversaries) or charitable giving under Gift Aid is a very effective tax tactic. Gifts made within seven years of death are, in general, ineffective for IHT. Such belated capital gifts are deemed part of your property, and estate, upon death.
3. Capital gifts made to a spouse are IHT-exempt. If you plan to leave your assets to your spouse then you have no inheritance tax payment problem. All the tax arises on the death of the survivor, effectively the IHT tax payment problem passes to him/her. However such IHT plans can easily go wrong! If your spouse is not UK domiciled, special rules apply.
4. Moving house, especially if this will secure release of substantial equity, may seem unwelcome. However the release of accumulated property equity can loosen your own spending plans, enabling the two generations to live better. You can perhaps make a property purchase into a more suitable, smaller property. Remember that SDLT has not increased recently for UK properties bought for under £900,000. The SDLT incurred on an effective property change may be a small fraction of your prospective IHT bill.
5. Those persons with annual pension income in excess of £25,000-£30,000 are better-placed. It is easier to give assets away if your income base is quite secure. All the more so, if your spouse/partner also has a respectable level of pension, investments or annuity income.
6. Better-off parents have developed a tendency to co-finance and/or co-own their children’s initial property purchase, aware of the enormous rise in U.K. property values since the 1960-1970 era. SDLT has made such co-ownership more expensive, but financial assistance given annually (e.g. covering the typical annual 4.00% mortgage charges) is an agreeable alternative gift route.
7. A new IHT relief gives a further exempt allowance (rising to £350,000 in 2020) to those who pass their residences upon death to their children, or step-children, or their descendants. The extra nil rate band applies to all 2017 deaths. Estates valued above £2.2 million will not benefit. Widows and widowers can benefit from the prior death of their spouse, even though this tax rule did not exist at that prior date of death e.g. in 2015 or 2016. These nil-rate band rules are complex, and extra relief is available after the down-sizing from a prior family residence.
8. Lastly, note that HMRC may cast doubts on existing family debts, implying that their repayment (i.e. from child back to parent) is unlikely - unless this is cast in tablets of stone. Such family loans can thus be wholly ineffective for IHT. Major issues can obviously arise with capital gifts made to young married couples, in the event of either marital discord or divorce. Such gifts thus need one’s full care and attention.