Inheritance tax planning
Inheritance tax (IHT) is a tax that is charged on the value of your estate upon death.
Inheritance Tax planning for married and civil-partnership couples
Inheritance Tax (IHT) was once regarded as a tax that only affected the very wealthy. However, rising property prices and a freeze on allowances mean many more people are facing a tax charge upon death. Everyone’s circumstances are different and it is important that (even those who might not consider themselves particularly wealthy) get proper tax and financial planning advice.
The IHT threshold for married couples
In most cases, there is a full IHT exemption for transfers between spouses and civil partners. This applies to both lifetime gifts and assets transferred on the death of one spouse. Care needs to be taken if one spouse is domiciled outside the UK as the spousal exemption can be restricted.
Inheriting property
No IHT will be paid on assets passing to a surviving spouse. In addition, assets could receive an uplift for Capital Gains Tax (CGT) purposes so that on sale, CGT will only be paid if the assets have increased in value since the date of death.
Inheriting an ISA or a pension
The IHT Spousal Exemption will apply to a spouse's ISA, meaning the value of the ISA would pass free of IHT. The surviving spouse can then add the inherited ISA assets to their existing ISAs, even if this would exceed the normal ISA allowance.
Pensions are slightly different and are generally exempt from IHT. The tax consequences of inheriting a pension will depend on how the pension is structured and the deceased’s age when they died. If they were under 75, it is generally possible to withdraw the funds tax-free. Otherwise, any withdrawals will be taxable at your marginal rate of income tax.
Read more on IHT and pensions here.
Tips to maximise IHT efficiency
The Spousal Exemption only delays the point at which IHT applies so a plan must be put in place to deal with the second death. Couples with even moderate amounts of wealth should seek joined-up tax and financial planning advice to ensure they are benefiting from legitimate ways of reducing their IHT liability, ensuring they can pass as much as possible to their families.
If arranged properly, a married couple can transfer up to £1m to their family without suffering IHT.
For those with assets of more than £1m, making lifetime gifts can be a tax-efficient way of passing wealth to the next generation. Lifetime gifts become exempt if the donor survives for 7 years from the date of the gift and there are various exemptions that may apply. However, it is important to ensure that sufficient assets are retained for a comfortable retirement and the tax consequences of making any gifts, for example crystallising a CGT liability, are taken into account before making a gift.
Everyone should have a will in place and review this regularly to make sure it properly reflects their wishes and keeps up with changes in tax law.
Get in touch
If you would like to speak with one of our advisers about your IHT requirements, please get in touch.
IHT planning for LGBTQ+ couples
While personal and family circumstances will differ for each couple, tax rules are the same for both LGBTQ+ and non-LGBTQ+ couples.
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