Inheritance Tax is a liability owed on the estate of a person who has died, that must be paid by the executor or administrator of their estate before it can be distributed to beneficiaries. Only an estate that is valued at less than the tax-free threshold - which is currently frozen at £325,000 - can be exempt from Inheritance Tax. Any value that exceeds this will likely be taxed at 40%.
Many high net-worth individuals seek estate management advice to try to minimise this, and one approach is to give assets as gifts before you die. However, it's important to understand in these cases that Inheritance Tax does not only apply to your estate when you die - it is back-dated to include any gifts given within the previous seven years before your death.
If you are concerned that loved ones may need to pay Inheritance Tax on gifts you gave away before your death, or want legal advice on giving Inheritance Tax-free gifts, the team at Switalskis can help. We know that there are both emotional and practical consequences to any decisions you make about your estate, and we'll support you throughout the process to avoid paying Inheritance Tax where you can, and minimise your liability where it cannot be avoided.
At Switalskis, we start any estate management or contentious probate process by listening to your needs. We know that every estate is different, and our advice has to be founded on the specifics of your circumstances, but we also want to consider the personal side of distributing your estate. Ultimately, we believe that your loved ones deserve to enjoy the full value of your estate, and that’s only possible when gifts are planned in a tax-efficient manner.
Tax-free allowances exist for a reason, and it’s important to take them into consideration or you risk paying more tax than you need to. Thanks to our experience in this area, Switalskis solicitors can take a comprehensive overview of your financial position, in which we consider every available allowance and factor affecting your tax liability, to make sure you only pay what you owe.
We were faced with a dispute situation that had the potential to drag on, however, once we had spoken with Sandra Kowalska, her professionalism, dynamism and direct approach ensured that the situation was resolved satisfactorily. We would have no hesitation in thoroughly recommending Sandra and her colleagues, they provide an invaluable and effective service at a time when it is needed.
Contentious probate client
Sandra Kowalska from Switalskis Solicitors has been absolutely amazing so far. Although our case is still ongoing, she has provided us with 5-star service every step of the way. Her communication is always clear, her approach is gentle and reassuring, and she always has an answer to any questions I have. We feel truly supported. Thank you again, Sandra!
Craig HunterContentious probate client
Sandra Kowalska handled a very complex change of house deed. She was very knowledgeable and professional and kept us updated along the way. She handled the stress and legal process leaving us to get on with other things. Would highly recommend. First class service.
Mandy ParkinContentious probate client
Inheritance Tax is levied on any estate that exceeds the relevant Inheritance Tax threshold in terms of its value. The current threshold, known as the nil-rate band, is £325,000, which is expected to remain frozen until 2030. Estates valued above this amount are subject to a 40% tax on the amount that exceeds the threshold - although it's important to say that other factors also affect the Inheritance Tax payable on each estate.
One example is the residence nil-rate band, which applies when you pass a main residence to your direct descendants (meaning your children or grandchildren). This allowance is currently set at £175,000, which means that you can pass on up to £500,000 tax-free if you give your main home to your children. You can also pass your main residence to your spouse or civil partner tax-free, and you can pool your tax-free allowance with that of your spouse if you later pass on the property to your direct descendants, which enables you to effectively double the allowance in some cases.
For an example of how Inheritance Tax works in practice, consider the following scenario. On an estate worth £600,000, with a main residence valued at £200,000 that is going to be left to your children, allowances could include £325,000 from the nil-rate band, and £175,000 on the residence nil-rate band, for a total allowance of £500,000. This leaves the excess at £100,000, on which you would pay Inheritance Tax at 40%, representing a £40,000 tax liability.
There are other considerations that apply and it can be complicated to understand how much Inheritance Tax you will owe on your estate under the current rules without legal support. The team at Switalskis can help you to plan and manage your estate in a way that will minimise how much tax you're expected to pay.
As we've mentioned above, your family will not only pay Inheritance Tax on your estate as it stands when you die - any gifts you gave in the seven years before your death are also liable for the tax under what's commonly called the 'seven-year rule'. Gifts made more than seven years before you die are generally exempt from Inheritance Tax - such an asset will be treated as a potentially exempt transfer until you die, at which point it will be determined whether or not tax is owed.
Gifts made within seven years of death are included in the estate for Inheritance Tax purposes and may be subject to tax, depending on their value and the total value of the estate. The tax payable on these gifts changes in value depending on when they were given, thanks to the application of a 'taper relief'.
Taper relief reduces the Inheritance Tax rate on gifts made between three and seven years before death. The reduction applies to the tax on the gift, not its value. The relief rates are as follows:
As with all of these estate management rules, there are also exceptions, and certain gifts are exempt from Inheritance Tax, regardless of the seven-year rule. For example, a small gift allowance makes gifts of up to £250 per person exempt, and wedding gift allowance applies to gifts given on marriage or civil partnership (up to £5,000 depending on the relationship). Up to £3,000 per tax year can be given as an exempt gift by taking advantage of an individual's annual exemption. They can also carry any unused annual exemption forward to the next tax year, but only for one tax year. This can also reduce how much tax is owed on these assets, although, if the total value of gifts made within seven years exceeds the Inheritance Tax threshold, it will be taxed according to the same rules.
This can all become complicated, especially when taking into account that taper relief applies only to the amount exceeding the nil-rate band, and that gifts must be outright and not result in a "reservation of benefit". This means that if the donor continues to benefit from the asset, such as living in a house they gifted, different rules will apply. Careful estate planning is recommended to manage the implications of the seven-year rule effectively, and this is where writing your will with the assistance of an experienced solicitor at Switalskis can make a big difference to your tax liability.
Got questions or ready to get going? Just give us a ring on 0800 1380 458 or drop us a line through the website. Whenever you need us, we're here to help.
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When it comes to Inheritance Tax on gifts, there are many factors to take into account in order to minimise your liability and make sure that your loved ones, friends and family members enjoy as much of your estate as possible. We have worked with many high net-worth individuals, business owners and others who are concerned about the management of their estate, and our approach is built on four key commitments:
The rules about when you need to pay Inheritance Tax on gifts and how much you owe can be complicated, but it's important to get them right to avoid the consequences of over or under-paying. At Switalskis, we excel at bringing clarity to these situations, and breaking down processes into the simplest terms to make it easy to secure your legacy.
We'll take the time to understand your specific personal circumstances to calculate the value of your estate accurately, and thereby help you to plan in a way that will minimise your tax liability. With our support, you can make gifts as cost-effective and tax-efficient as possible before you pass away and avoid passing on a significant tax liability to your friends and family members.
Our expertise has been developed over many years of practice, and we stay up-to-date with all of the legal changes in this area. These factors, along with our strong track record of success, show that we're in a strong position to maximise the value of your estate and minimise your tax liability. You can feel confident when working with Switalskis that there will be no financial surprises later down the line.
Our aim is to help you secure the best outcome possible, no matter what you want to achieve. As such, we'll remain committed throughout the process to protecting your interests and mitigating any financial risks, so you can minimise your tax liability in full compliance with the law.
Managing a complex estate legally and minimising the amount of tax you owe in the process can be complicated without dedicated, bespoke legal support.
To speak to a solicitor about the rules on giving gifts before death, or for an assessment of the most tax-efficient way to give a significant gift, call Switalskis today on 0800 1380 458 or send us a message through our website to get things moving.
