24 Apr 2018
Author: Stephen Breen
Many people are missing out on substantial inheritance tax perks because they are writing their own Wills or using cheap DIY services, rather than consulting a solicitor, according to industry experts. Yet more are missing out by doing probate work themselves, believing they can save money and completely unaware that more valuable tax reliefs may be available.
If you act as an executor and fail to claim tax relief that should apply to the estate, you could be sued by the beneficiaries of the estate for their loss. Experts are urging those handling estates on behalf of loved ones to get a professional to check the figures before submitting the estate accounts.
In the 2016/17 tax year, HMRC collected £4.8 billion in inheritance tax: a huge increase from the £3.1 billion collected in 2012/13. Despite this substantial increase, the amount of relief claimed has dropped from 54% to 41% over the same period. Using an experienced solicitor both to draft your Will and to handle probate for a loved one’s estate ensures that all applicable reliefs are claimed and there is no possibility of beneficiaries missing out on money they are entitled to.
Inheritance tax rules can be complex – particularly with the introduction of the Residence Nil Rate Band – and HMRC won’t check that you’ve claimed everything that the estate should be entitled to. For example, most people have heard of the seven year rule which dictates that gifts will be free from tax if you survive for seven years after the date of the gift: but less know about ‘taper relief’ which applies if someone dies within the seven year period.
There are various inheritance tax exemptions that apply to gifts: such as the £3,000 annual allowance which can be rolled over for one year, any gifts you make out of your income (provided that you can maintain your standard of living after making the gift), up to £1,000 in wedding or civil ceremony gifts (£5,000 for a child, £2,500 for a grandchild or great-grandchild), gifts of money to help others with living costs, and small gifts of up to £250 per person provided that you haven’t used another exemption on the same person. An estate planning solicitor can advise you fully on how these can reduce the amount of inheritance tax payable on your death.
A range of other reliefs are available – for example: business relief which allows some assets to be passed on either free from inheritance tax or at a reduced rate; agricultural relief where the estate includes a farm or woodland; and reduced rates where you leave a substantial gift to charity.
The new RNRB allowances, whilst welcome, have made calculating inheritance tax even more difficult than before. These give an additional allowance on top of the £325,000 personal allowance where the Deceased’s main residence, or assets equivalent to this where the person has either sold their home or downsized, is passed to a ‘direct descendant’. The RNRB rates are £125,000 for the 2018/2019 tax year, £150,000 for 2019/2020 and £175,000 for 2020/2021, in addition to the personal allowance. If the Deceased is married and leaves everything to their spouse, the spouse’s estate will benefit from a100% uplift on their inheritance tax allowance when they die, including the RNRB rate that applies at the date of the second death. This means a couple could potentially pass up to £1 million to their children, tax free. However, few people appreciate that if they die and their partner remarries, the last Will their partner made is automatically revoked and their new partner will be first in line to inherit the bulk of the estate. Careful planning with the help of a solicitor can avoid this scenario and ensure there are still assets to pass on to children or grandchildren, even if a surviving spouse should marry again.