Higher value estates are subject to Inheritance Tax (IHT) once you have died.
Many people will consider the role that their property, investments and savings play in establishing the value of their estate, but there are other considerations.
The items you own, known as personal chattels, are included in these calculations, which can be an issue if you have high-value belongings.
As more people invest in luxury items, it is worth understanding how such things may increase your exposure to IHT and what will happen to them once you are gone.
Will I need to pay Inheritance Tax?
Only estates that surpass the threshold established by the Nil-Rate Band (NRB) will need to pay IHT.
In the UK, the NRB provides each individual with £325,000 of IHT-free assets and this can work with the Residence Nil-Rate Band (RNRB), which is a further £175,000 allowance if you leave your main home to a direct descendant, such as a child or grandchild.
A spouse can transfer any unused NRB or RNRB to the surviving spouse, which means a couple can pass on up to £1 million tax-free under the right circumstances.
Once other tax reliefs, such as Business Property Relief or Agricultural Property Relief, have been applied, the remaining estate is taxed at a rate of 40 per cent.
Your high-value items like cars, watches, jewellery and handbags will all be included in the valuation of this estate.
Personal chattel items are not subject to low-value exemptions, meaning that most items will contribute to the value of your estate.
How can I protect my luxury items from Inheritance Tax?
While you may not be around to enjoy it, the thought of a classic car being sold to pay a tax bill may be distressing for you and your loved ones.
You can mitigate the exposure to IHT by parting with some of your luxury collection at least seven years before you die.
Gifting assets seven years before you die generally places them outside of IHT and will see them taxed at a tapered rate if you die in the years between gifting and hitting that seven-year milestone.
You will need to have evidence that something was gifted though and cannot continue to use it as you did before.
Holding onto gifts causes them to be known as a gift with reservation of benefit and does not limit IHT exposure.
It is possible to pay a market-rate rent to use the item after making a gift, but this must be regularly reviewed to ensure it remains at market-rate.
Ultimately, only through working with a trusted expert can you ensure your estate is structured effectively to mitigate IHT exposure.
Our team are here to review your estate so that you can understand the best way to retain control of your assets even after you die.
For expert support with Inheritance Tax planning, get in touch with our team.
