Inheritance tax receipts reach yet another record high

18 November 2016

The amount collected by HMRC through Inheritance Tax receipts has hit yet another record high of £4.72bn this year*, indicating how much money grandparents looking to pass on their assets could save through carrying out sensible tax planning, says Wilsons, the private client law firm.

Wilsons explains that higher house prices coupled with the freeze on the inheritance tax free threshold means that more estates are coming within the scope of IHT.

Wilsons says that parents and grandparents often wish to leave their wealth to their children and grandchildren in order to help with major life events such as moving house, getting married or having children. However, this could leave beneficiaries with a substantial IHT bill, if not passed on in a tax efficient way.

The need to efficiently pass wealth between generations is growing - it is estimated that the over 65s have a combined housing wealth of £1.3 trillion, whereas younger generations faced with high house prices and student debt can often struggle to purchase property or save for the future.**

Wilsons says that there are a number of simple steps which grandparents can take to benefit their relatives as and when they need a helping hand whilst bringing down the overall tax bill:

  • Wilsons says that more people need to make uses of their annual allowance.For example there is an annual exemption which allows individuals to give gifts totalling £3,000 a year, IHT free. Between two grandparents this could mean a significant amount of money over a long term period, and would for example allow grandparents to contribute to their grandchildren’s education.
  • Wilsons adds that there is also a small gift allowance, which allows an individual to make gifts of up to £250 per recipient free from IHT. 
  • Grandparents can also make regular gifts out of what they declare to be ‘their surplus income’*. These gifts will be IHT free provided grandparents can prove that the gift does not affect their standard of living.
  • Whilst recent changes to stamp duty may have made purchasing property for grandchildren slightly more difficult to structure, many parents and grandparents will still want to help their children get on to the property ladder.  Contributions to a deposit can be structured by way of outright gift or loan, or alternatively the property can be co-owned. ***
  • Wilsons says that a deed of variation can also be an important tool in avoiding unnecessary IHT. As people live longer, children will often be grown up with families of their own before their own parents have died. 'A deed of variation can allow a grown-up beneficiary to keep the value of an inheritance out of their estate to avoid increasing their IHT exposure.****
  • Wilsons adds that pensions can now be used as tax planning vehicles.If a pensioner dies over the age of 75 the pension can still pass to the beneficiaries free of IHT but may be subject to income tax.Therefore rather than nominating the pension in favour of a surviving spouse who is a higher rate taxpayer the pensioner may decide to nominate it in favour of grandchildren with no or little other UK income.

Jessica Broxup, Solicitor at Wilsons adds: “Grandparents want to know that the money they leave to their children and grandchildren won’t be eaten up by tax unnecessarily."

“One simple way to reduce IHT bills is to give away money or other assets whilst living.  Provided you survive the gift by seven years, or it attracts a relief or exemption, and you cannot continue to benefit from the asset given away, this should reduce the value of your estate for IHT purposes."

“Whether you decide to gift a portion of your assets during retirement to your children or grandchildren or use your pension as a vehicle to pass down wealth – there are many options available.”

“It’s natural for grandparents and parents to want to ensure their offspring are secure in the future - but for this to be effective its best to start planning early.”

“As a general rule it’s a good idea to review your will every five years to ensure its still fit for purpose.”

*Year-end 30th September 2016, Source: HMRC

** Source: Brewin Dolphin and Centre of Economic and Buisiness Research

*** Each possibility has its attractions and drawbacks from the point of view of tax planning and protecting the assets from non-tax threats such as the relative financial immaturity of the grandchild in question.  Grandparents looking to make this significant financial commitment should consult a tax advisor first about the optimum way to provide the funds and structure the ownership of the property.

**** Ideally beneficiaries would not need to rely on a deed of variation, which may not always be possible to ensure tax efficiency for the benefit of the wider family.   If grandparents intend to benefit their grandchildren, and their children are already independently wealthy,   they should review their wills to ensure that the structure allows their wealth to go directly to their grandchildren, if this is where it is needed most, without passing through their children's estates.  

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