If you intend to leave savings, property or other assets to family or friends after you die, you need to 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 unless your estate qualifies for other inheritance tax exemptions or transferred nil rate bands. If you are leaving property to a family member, the main 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. Steps can be taken to increase the likelihood of your estate qualifying for this allowance.
Whilst the nil-rate band has remained the same since 2010/11, the main residence nil-rate has steadily increased each year since 2017. This April, 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. Any inflation and increase in property prices over the next 5 years could mean an estate that is currently valued at below the IHT threshold, might be pushed over the limit.
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 their partner was entitled to.
If your spouse or civil partner left their entire estate to you, you could apply both your own and your partner’s tax-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. For some people, getting married or becoming civil partners can save inheritance tax but for others it won’t make any difference.
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.
To encourage charitable donations, assets left to a qualifying charitable body are exempt from IHT. Moreover, if you leave 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%.
Our Inheritance Protection team have significant experience in advising on Inheritance Tax matters. For more information and how the team can help, please contact Lucy Savage