Estate and tax planning

“Use or lose it” is a common phrase used to describe annual tax reliefs and allowances each tax year. There are several tax allowances to take advantage of, each with a common purpose in mind – to encourage savings or reduce the amount to tax to pay. From the ISA and Pension annual contributions allowances designed to boost wealth to the Savings and Dividends allowances that save Income tax. From the annual capital gains allowance to save Capital Gains Tax to the many gifting allowances to save Inheritance Tax. Each year they all add up and using them wisely can save many thousands of pounds over the long term.

Many tax exemptions apply for those married or in a civil partnership. Claiming the Marriage Allowance can save Income Tax whilst transfers of asset ownership to spouses or civil partners can help avoid or reduce payment of Capital Gains Tax. There is no IHT liability if you pass on a home to your spouse or civil partner when you die and you can combine up to £500,000 personal Inheritance Tax free allowance with that of your surviving spouse or civil partner to create a total of up to £1,000,000 IHT exempt estate (if you leave your joint property to your children or grandchildren).

Everyone is entitled to an ‘annual exemption’ allowance for gifts of up to £3,000 each tax year – any unused annual exemption can be carried forward to the next year but is only valid for one year. Other exemptions include wedding or civil ceremony gifts of up to £1,000 per person (£2,500 for a grandchild and £5,000 for a child). This can be combined with other exemptions as gifts to the same person – such as a birthday and wedding gift to a child.

You can reduce the IHT rate from 40% to 36% by leaving 10% of your estate to a UK registered charity, political party or local sports club.

IHT is based on a person’s domicile - a legal concept that transcends nationality, residence, and ethnicity. Broadly, you are UK domicile if you were UK tax resident for 15 of the last 20 tax years but the rules are complex. If you are UK domiciled the estate is liable to IHT on all your worldwide assets. But if you are non-UK domiciled, IHT is chargeable on assets held only in the UK. Understanding your domicile status is a key part of IHT avoidance planning.