Buckingham Palace recently released a first picture of King Charles III carrying out official government duties from his red box, marking a move from the official mourning period to ‘getting on with the job’.

In tandem with official business, the King may also be turning his mind to his personal affairs. It is often prudent to re-examine your own personal planning – particularly your will – at a time of a significant life event, whether a birth, death, marriage/civil partnership or otherwise.

His inheritance from the late sovereign is estimated to be in the region of £370M. This includes land, jewellery and many less common possessions such as certain animals inhabiting the waters of the British Isles. In Scotland, these include stranded whales measuring more than 25 feet from the snout to the middle of the tail!

One consideration within the King’s planning would include inheritance tax.  Few of us will be familiar with the Sovereign Grant Act and its accompanying Memorandum of Understanding on Royal Taxation from 2013. That memorandum sets out the arrangements of the King in relation to voluntary tax payments. This includes three main taxes familiar to many of us: capital gains tax, income tax and inheritance tax.

Inheritance tax – which typically becomes payable on death – is charged at a flat rate of 40% of value above the inheritance tax threshold. That threshold is set at £325,000 for an individual, has been frozen at that amount since 2009, and will remain at that amount until at least 2026.   Often the largest asset in an estate is the family home and, with rising house prices, more estates have become liable to inheritance tax.

HMRC received more than £6 billion of inheritance tax receipts in the tax year ended 5 April, 2021 – up 14% from the previous financial year, with an average bill of more than £200,000, and total receipts have more than doubled since the nil-rate band was last increased.  A significant proportion of those receipts will already have been taxed at least once under one of those three main taxes.

In relation to a future transfer of the King’s own private wealth, the memorandum provides that inheritance tax will not be paid on gifts or bequests from one monarch to the next – only on gifts and bequests to anyone else.  The memorandum gives the rationale for not taxing assets passing from one monarch to the next as being that many of those assets have ‘an official as well as private use’, the Monarchy needs ‘sufficient private resources to enable it to continue to perform its traditional role in national life’ and ‘financial independence’ from the government of the day.

For the rest of us who the memorandum does not apply to, fortunately there are a number of options available to mitigate inheritance tax.

In addition to the ‘nil-rate band’ of £325,000 (no inheritance tax is payable on value within this band) there is up to a further £175,000 tax free exemption (the ‘residence nil-rate band’) available where the family home is left to lineal descendants (children and grandchildren).  The residence nil-rate band is complicated (advice from your solicitor is essential) and will taper away for an estate worth more than £2 million.

Gifts between spouses and civil partners will usually be exempt from inheritance tax.  It is often the case that a will is structured such that on first death the deceased spouse or civil partner will leave the entire estate to the surviving spouse or civil partner. That transfer is exempt from inheritance tax. The surviving spouse or civil partner may then engage in further planning or vary the estate (by a deed of variation) to cascade wealth down a further generation.

Certain types of assets that have been owned for two years or more may qualify for ‘business property relief’ (relief being at a rate of either 100% or 50%, depending on the nature of the asset and how it is held). This can include shares in certain types of trading company or other specialised investments. Other assets related to farming may benefit from ‘agricultural property relief’ (similarly relieved at a rate of either 100% or 50%).

Regular gifting can be a powerful tool.  Each of us has an ‘annual exemption’ of £3,000 each tax year. Gifts may also be made on the occurrence of certain happy events: for a wedding each tax year you may give up to £5,000 to a child, £2,500 to a grandchild or £1,000 to any other person.  Small gifts of up to £250 for a person per tax year is another possibility.  Much larger cash gifts can also be made – these are known as ‘potentially exempt transfers’ and set a seven year ‘clock’ running. After seven years the gift will fall fully outside of your estate. If you should die within the seven years, then inheritance tax will begin to taper down between years three and seven from the date of the gift.

For those with substantial excess cash, a further alternative can be to create a discretionary trust and then, using the ‘nil-rate band’, gift £325,000 into that trust (spouses may together gift £650,000). If the person gifting survives for seven years from the date of that gift the nil-rate band will refresh in full.  This can be an effective technique and be repeated on more than one occasion (creating several trusts each separated by seven years). That type of trust will often be used to benefit adult children or grandchildren.

One less well known – but very effective - exemption is where regular gifts are made out of surplus income. There is no monetary limit to this type of gift although the rules relating to it must be strictly adhered to: gifts must form part of normal expenditure, be made out of income, and leave the person gifting with sufficient income to maintain their usual standard of living.

For all types of gifts, it is important to keep detailed records of these. That can mitigate the need for your executors to have to trawl forensically – as they often must do - through seven years’ worth of bank statements.

Consider also a gift to charity which is itself exempt from inheritance tax. Additionally, the 40% rate of inheritance tax will reduce to 36% if you leave 10% of the net value of your estate to charity in your will. A charitable gift to a favoured charity can do an immense amount of good.

Implementing these planning options and achieving the most tax-efficient outcome – and at its core must be a professionally prepared Will – is best done in conjunction with the family solicitor, accountant, and wealth adviser. All working holistically together as one cohesive team.

At Burness Paull, our private client team has one agenda: yours. If we can be of any assistance, please do not hesitate to get in touch.

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