If you intend to leave savings, property or other assets to family or friends after you die, you should consider inheritance tax (IHT). It could cost your heirs up to 40% of their inheritance. By planning ahead, you can minimise IHT and ensure as much of your estate as possible reaches your loved ones.
The tax-free inheritance allowance, known as the nil-rate band, allows your beneficiaries to inherit up to £325,000 of your estate without incurring tax. On anything above this threshold, the standard 40% inheritance tax rate applies.
If you are leaving property to a family descendant, the residence nil-rate band may also apply. This is an additional tax-free allowance that you can use if you pass on a property that you have lived in to your direct descendants, for instance, your child or grandchild. Currently, the main residence nil-rate band stands at £175,000.
Whilst the nil-rate band has remained the same since 2009/10, the residence nil-rate band has risen substantially from its introduction in 2017. It was intended that both nil-rate bands would rise each year with inflation from April 2021. However, it was announced in the 2021 budget that the IHT thresholds would be frozen until 2026. A five-year freeze is significant in IHT planning, and it is advisable to review your situation in light of this announcement.
Most of us want the wealth we have accumulated over our lifetime to be put to good use by those we leave it to. Sadly, when end-of-life financial plans are not put in place, a large portion of assets can be diverted away from the intended recipients. However, with careful preparation, you can ensure as much as possible of your estate reaches your loved ones. As IHT planning can be complex, it is best to seek professional advice.
There are many steps you can take when IHT planning, including:
Spouses and civil partners usually inherit tax-free from their partner. Additionally, they can make use of the nil-rate allowances to which their partner was entitled.
If your spouse or civil partner left their entire estate to you, you may be able to apply both your own and your partner’s IHT-free allowances when you pass on your estate. Doing so effectively doubles what you can leave your heirs without incurring any tax. If your partner uses a proportion of their nil-rate band to leave assets to others, then you will only be able to apply the percentage of the allowance they did not use. There are complicated rules setting out how the residence nil-rate band can be used.
Gifting money or other assets before you die can reduce how much inheritance tax will be due on your estate. However, this must be done carefully as the timing of any gift is crucial. If it is made seven or more years before your death, the recipient will not have to pay any IHT on it. If you die within seven years of making the gift, IHT may be incurred. It will depend on the type and value of the gift, and how much of the seven-year period has passed.
To encourage charitable donations, assets left to a qualifying charitable body are exempt from IHT. Moreover, if you leave on death at least 10% of the value of your estate that surpasses the nil-rate bands to charity, you can reduce the IHT rate due on the remainder from 40% to 36%.
Members of our Private Client team are on hand to advise on any issues relating to Inheritance Tax and Trusts. Please telephone 01892 526344 or email enquiries@berryandlamberts.co.uk.
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The contents of this article are for the purposes of general awareness only. They do not purport to constitute legal or professional advice. The law may have changed since this article was published. Readers should not act on the basis of the information included and should take appropriate professional advice upon their own particular circumstances.
