When preparing Wills, many people want to ensure that they are as tax efficient as possible in order to avoid the payment of Inheritance Tax. There are various Inheritance Tax exemptions that can be explored, which includes gifts for national purposes.
Inheritance Tax allowances
The current Nil Rate Band, that being the amount an individual’s estate can be worth before having to pay Inheritance Tax is £325,000.
An additional allowance, called the Residence Nil Rate Band could also potentially be available to individuals should they pass their home to a direct descendent on their death. This allowance is currently set to £150,000, rising to £175,000 in the next tax year, starting 6th April 2020.
Married couples will also be able to make use of both their and their deceased’s spouses allowance on second death doubling the figures above.
How is a person’s estate valued for Inheritance Tax purposes?
When someone dies, their estate is valued by adding together the value of the assets they own at their death and the value of the gifts they have made during the last seven years of their life.
The next step is to work out the total value of the Inheritance Tax free allowances and exemptions available to that estate. Any remaining balance is taxed to Inheritance Tax, usually at the rate of 40%.
What can be included as part of an Inheritance Tax allowance?
The Inheritance Tax free allowances most people are aware of are as follows:
- Inheritance by a deceased’s spouse or civil partner.
- Inheritance by charities.
- Assets that qualify for Business Property Relief or Agricultural Property Relief can be exempted or reduced in value for Inheritance Tax purposes
- Lifetime gifts made within the last seven years of life can be exempt if they fall within the permitted exemptions, such as the annual allowance, small gifts exemption or regular gifts out of excess income exemption.
However, an allowance that many people may not be aware of are gifts for national purposes.
What are gifts for national purposes?
Any gift, whether in a Will or during someone’s lifetime, no matter the amount, would be considered as Inheritance Tax exempt as long as the institution falls under HMRC’s permitted category of institutions.
The type of institutions which qualify for gifts for national purposes are:
- Any other similar national institution which exists wholly or mainly for the purpose of preserving for the public benefit a collection of scientific, historic or artistic interest and which is approved for the purposes of this Schedule by the Treasury.
- Any museum or art gallery in the UK which exists wholly or mainly for that purpose and is or has been maintained by a Local Authority or university in the UK.
- Any library, the main function of which is to serve the needs of teaching and research at a university in the UK.
- Any Local Authority.
- Any Government department (including the National Debt Commissioners).
- Any university or university college in the UK.
Such organisations which would qualify for gifts for national purposes includes:
- The National Gallery
- The British Museum
- National Museums of Scotland (from 1st October 1985 – previously the Royal Scottish Museum)
- National Museum Wales
- Ulster Museum
At Nelsons, an estate that we recently dealt with had an Inheritance Tax saving of £120,000 after putting forward an application to HMRC that the organisations that the deceased left their estate to were organisations which would mean the legacies qualified as gifts for national purposes.
How Nelsons can help
If you would like to discuss any of the points raised in this article, please do not hesitate to contact our expert Wills, Trusts & Probate team in Derby, Leicester or Nottingham on 0800 024 1976 or via our online form.