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The upcoming changes to inheritance tax mean effective estate planning is more important than ever

The Government’s most recent budget was designed to avoid major tax increases as we try to restart the economy following the COVID pandemic.  However, certain changes – including upcoming changes to Inheritance Tax (IHT) – had to be made as the tricky task of rebalancing the books begins.

According to The Institute of Fiscal Studies, by 2025 the UK government’s debt will be 110% of National Income.  This will leave the government having to raise an additional £40bn per year.  Despite receiving a relatively easy ride in the recent budget and in the subsequent announcements made after the UK’s first ‘Tax Day’ on the 23rd of March, one cannot underestimate the long-term contribution IHT will make to finding this additional £40bn each year.

In 2018/19 alone £5.38billion in IHT was paid to the Government, a sum that can’t be ignored.

IHT is usually charged at 40% over their available tax-free allowance (known as the ‘Nil Rate Band’) which is £325,000 for a single person without issue and a residence to leave to them.

It is a notoriously complex process to manage.  This is why the responsibility is often passed to a lawyer.  To delegate this responsibility, the beneficiaries must apply for a Grant of Probate.  This provides the lawyer with a legal right to administer the division of the deceased’s property, money and other assets.

However, this is only possible if there is a Will that confirms who the executors of the Will are.

If there isn’t a Will or if the designated executors are unwilling to carry out their duties, a Grant of Letters of Administration would have to be applied for.  This appoints an officially recognised administrator to deal with the estate.

Up until now executors or administrators would be required to submit either an IHT205 or IHT400 form to make sure IHT was calculated and charged correctly.  As of January 2022, this will change.

After January 2022 up to 90% of estates (the exact qualification criteria is yet to be confirmed) will no longer be required to submit the current inheritance tax paperwork.  It is a move many feel is being made to allow the government shift their focus to physically collecting the IHT they’re owed.

Moreover, the changes will also mean beneficiaries will need to settle their inheritance tax bill before the Grant of Probate is issued.  This means that if the money isn’t available to settle the bill, difficulties could arise.

At present any tax payable on cash assets must be paid within 6 months of the date of death before a Grant can be issued.  Meanwhile, any tax payable on property can be paid in 10 annual instalments with the first instalment due either 12 months from the date of death or upon sale.

Staying ahead of these penalties could end up forcing the beneficiaries to take out an inheritance tax loan that will invariably come with its own interest charges.

This potential outcome has made it even more vital to look into how you can use your Will and estate planning to ensure your beneficiaries’ IHT liability is kept to a minimum and make sure they receive the maximum benefit from your legacy.  This level of planning is best left to an experienced lawyer.  They will be able to identify all the relevant exemptions and use these to ensure the plans you put in place for your estate are as tax efficient as possible.

Although the available exemption will vary from person to person and family to family, some of the most common include:

The nil rate band

The transferable nil rate band

The residence nil rate band

The transferable residence nil rate band

Spousal relief

Business and/or agricultural property relief

Charitable relief

Gifts out of excess income

The fact the rules around the application of these exemptions are also highly likely to change over the next few years makes it even more important to seek estate planning advice from not only an experienced but also a recognised and regulated professional.

It also means there is enormous value in revisiting and reviewing your Will and the other plans you have already put in place as both your circumstances and the supporting legislation could well have changed.

However, the benefit of using an experienced lawyer extends far beyond simply making sure your Will is as tax efficient as possible.  We would always recommend you also enlist a professional to obtain probate and deal with the administration of your loved one’s estate.  Their knowledge and expertise will ensure all the correct reliefs are claimed so your inheritance tax liability is kept to a minimum.

If you would like to review your Will or your Inheritance Tax planning provisions and discuss what you could do to mitigate any future changes to the IHT rate, please email deniece.lines@collinshoy.com or call Deniece on 0208 866 1820.