Handing your estate to your children

inheritance tax planning - handing your estate on to your childrenThe Summer Budget brought news for those worried about rising house prices and the impact Inheritance Tax (IHT) could have on their ability to pass on the family home to their children. George Osborne announced a new ‘family home allowance’, worth up to £175,000 per person from 2020.


A new ‘family home allowance’

This ‘family home allowance’ will be available if you leave your main house to your children or grandchildren. In these circumstances, the value of the house can be apportioned against the home allowance before the main personal allowance of £325,000 begins to be used.

The allowance is being phased in over four years with an initial £100,000 available from April 2017. However, with a married couple or civil partners looking at the chance to pass on up to £1 million (where the house is worth £350,000 or more), many people’s concerns about IHT may begin to ease.

However, for those with larger estates, there will still be concerns. So what can be done to start to reduce a liability?

Reducing inheritance tax liability

IHT is a complicated area and professional advice is always recommended for those looking to plan to reduce it. However, in very simple terms, the following outlines some options that might be available.

First, the annual exemption. This is £3,000 a year and can be given to anyone. In addition, you can give up to £250 per person per tax year to as many beneficiaries as you like – as long as no recipient also benefits from the main £3,000.

Second, you can make gifts to couples getting married – up to £5,000 to a son or daughter, £2,500 to a grandchild and £1,000 to anyone else.

Separate from these exemptions is the ability to give away excess regular income that you do not require. As long as you can demonstrate that after giving the money away, you can still afford your lifestyle, you can use it for a number of things, eg:

  • Christmas, birthday, wedding, civil ceremony and anniversary presents;
  • Regular payments into a savings account; and/or
  • Premiums on a life assurance policy.

If you have a very serious liability to IHT, the last one might be useful when considering another approach to reducing your liability – setting up a life assurance policy in trust, the proceeds from which do not form part of your estate and can be used to pay an IHT bill directly.

The only way to reduce your liability beyond the methods mentioned above is to give further assets away while you are still alive – if you could live without them! Even then, taper relief means that if you died within seven years of making any such gifts these would be at least partially added back into your estate.

None of this, of course, is simple. Consequently, if you would like to have a conversation about your own situation, please do get in contact.

This information is based on our understanding of current HMRC tax rules applying for tax year 2015/16, which may be subject to future change, and of the relevant Summer Budget proposals.

The Financial Conduct Authority does not regulate tax advice.

The value of the investment can go down as well as up and you may not get back as much as you put in.

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