What Taxes Should I Consider in Estate Planning?

Note: The following article is part of our Complimentary Articles Series, designed to provide additional insights and detailed information on specific topics within estate planning.

In conjunction with the following article, we recommend you review the following pillar articles to understand inheritance taxes comprehensively.

• What is Inheritance Tax (IHT)?
• How Do I Pay Inheritance Tax to HMRC?
• How Much Inheritance Tax Do I Have to Pay?
• When Does IHT Need to Be Paid?

Caution: While this article clarifies some common misconceptions about tax compliance in your estate planning, the content serves as a guideline only. When making tax-related decisions, always consult a tax professional.

INTRODUCTION

In our comprehensive library of articles on tax-related matters, you will find that we have covered the subject of Inheritance Tax (IHT) in great detail, given its importance in estate planning.

However, depending on the complexity of your Estate, the type of assets in your Estate, and how they are held, several other taxes may also be relevant in addition to IHT.

This article outlines the key taxes you should consider in estate planning and administration.

INHERITANCE TAX (IHT)

IHT is a tax on an individual's property, assets, cash and possessions ("the Estate") when they pass away.

To recap previous articles in our resource library on IHT:

• No IHT is due if the Estate's value is less than £325,000 or if everything above that amount is bequeathed to a spouse, civil partner, or charity.

• Everything above the £325,000 threshold is subject to IHT at the standard IHT rate of 40%.

How It Differs from Other Taxes

• Unlike Income Tax and Capital Gains Tax, which are based on income from assets or gains from the sale of assets, IHT is a one-time tax assessed on the total value of the deceased individual's Estate.

Responsibility for Payment

• The Estate is usually responsible for paying IHT before distributing the remaining assets to the Beneficiaries.

INCOME TAX ON INHERITED ASSETS

Beneficiaries may need to pay income tax on any profits derived from their inherited assets. For instance, the inheritance may include a property that generates rental income or an investment that yields dividends.

How it Differs from Other Assets

• Unlike CGT, which is based on a trigger event (a sale), or IHT, a one-time levy based on the Estate's value when the Testator passes away, Income Tax is levied annually.

Responsibility for Payment

• The Beneficiary is responsible for declaring any income generated from inherited assets. Income Tax must be calculated and paid on total income generated, according to the applicable tax rate and bands.

Tax Rates and Bands

• Income tax is subject to tax bands, and the amount payable will depend on the Beneficiary's total income. 

CAPITAL GAINS TAX (CGT)

When Beneficiaries decide to sell inherited assets that have appreciated in value, such as property, Capital Gains Tax (CGT) is imposed on the profit.

When calculating CGT, you should consider the difference between the asset's selling price and its value on the date of the original owner's death.

The rate of CGT will depend on the Beneficiary's personal income tax band (i.e., whether they are a basic rate or higher rate taxpayer).

How It Differs from Other Taxes

• Tax is levied on the profit (capital gain) made from the sale of the asset rather than the income generated from the asset (income tax).

• Unlike income tax (an annual tax) or IHT (assessed at the time of death), CGT requires a trigger event, such as the sale of an asset.

Responsibility for Payment

• The party that profits from the gain from selling the asset is responsible for CGT, unlike IHT, which is the responsibility of the Estate.

POTENTIAL ENTRY/EXIT CHARGES AND TRUSTS

When certain assets are placed into specific Trusts, they generate entry, periodic, and exit charges. These charges are usually applicable at various times, such as when the Trust was established, at regular intervals (e.g. 10 years), or when assets are transferred out of the Trust.

WHEN IN DOUBT, CONSULT A TAX PROFESSIONAL

Knowing the subtleties associated with each tax type is essential for tax-efficient, compliant estate planning, especially regarding inherited assets.

Each tax type has its own set of rules and thresholds, and the consequences of not accurately reporting and paying these taxes can be significant.

If your Estate is complex or you're in doubt about any tax aspect, we recommend you seek guidance from a tax professional to ensure full compliance and err on the side of caution.

Need to know more?

You can also speak to a qualified estate planning company for a free initial consultation to discuss your options. Since we have the expertise to assess your Estate and understand your unique requirements, we can suggest appropriate lawful approaches for tax planning and estate administration, putting you in contact with our legal and tax experts where applicable.

Book a callback, and we'd be happy to arrange a no-cost, no-obligation discussion with you to lay out the options available.

Alternatively, call us on 01233 659 796.

Or reach out to us here.