Inheritance Tax is an unpopular and controversial tax, coming as it does at a time of loss and mourning. It is no longer something that only affects the very wealthy and can impact on families with even quite modest assets.
The good news is that there are ways to limit the amount of Inheritance Tax your loved ones may potentially face.
What is Inheritance Tax?
Inheritance Tax (IHT) is a tax on the estate of someone who has died, including all property, possessions and money.
How much does it cost?
IHT is potentially charged at a rate of 40% on the value of everything you own above the Nil-Rate Band (NRB) set by the Government. This is currently £325,000 and frozen until 2021.
So, if your estate is worth £500,000 and your IHT threshold is £325,000, the tax charged would be on £175,000 (£500,000 – £325,000). The tax would therefore be £70,000 (40% of £175,000)
Transferable Nil-Rate Band
Couples can transfer an unused NRB to their partner when they die. This can double the amount of NRB available up to £650,000 and is known as Transferable Nil-Rate Band (TNRB)
Resident Nil-Rate Band
The Resident Nil-Rate Band (RNRB) is also known as the ‘Home Allowance.’ To be eligible you must pass your home, or a share of it, to your children or grandchildren. This includes stepchildren, adopted children and fostered children, but not nieces, nephews or siblings. The RNRB rate is currently £150,000 but set to rise to £175,000 in 2020.
Can I avoid paying Inheritance Tax?
There are legitimate ways to mitigate against Inheritance Tax. However, some of the most valuable exemptions must be used seven years before your death to be fully effective. It therefore makes sense to obtain independent professional financial advice and consider ways to tackle this issue sooner rather than later.
Some gifts and property are exempt from IHT, such as some wedding gifts and charitable donations. Relief might also be available on certain types of property such as farms and business assets.
If the person who died gave a gift in the seven years before they died, it’s counted as part of the estate, and likely to incur IHT. How much tax is due depends on the value of the gift, when it was given and who you give it to.
Reducing Inheritance Tax
Trying to reduce how much IHT is due on an estate is complicated. But, in short, you can reduce how much tax is paid by:
- Leaving your estate to your spouse or civil partner – Dying intestate – without a Will – means relatives other than your spouse or registered civil partner may be entitled to a share of your estate, triggering an Inheritance Tax liability.
- Leaving a legacy to charity – If you leave at least 10% of your estate to a charity or number of charities, then your IHT liability on the taxable portion of the estate is reduced to 36% rather than 40%.
- Putting your assets into a Family Trust – This can be useful as a way of reducing Inheritance Tax, making provision for your children and spouse, and potentially protecting family businesses.
- Paying into a pension instead of a savings account – Pensions are not counted as someone’s estate for inheritance tax (IHT) purposes. There are, however, pitfalls with this option including varying tax treatments on pension funds, subject to the age of the member on death. You would benefit from expert financial advice to understand the full implications.
- Regularly giving away up to £3,000 a year in gifts – You can gift as much as you wish, and this is known as a Potentially Exempt Transfer (PET). However, you will need to live for seven years after making such a gift for it to be exempt from Inheritance Tax.
Without making provision for Inheritance Tax, your loved ones could be faced with a large tax bill when you die. They may even have to sell assets, such as the family home, in order to pay the bill.
With some forward planning, we can help ensure that the people you want to benefit from your estate do. To assess whether you need to consider making plans to mitigate a possible Inheritance Tax liability, get in touch.
THE FINANCIAL CONDUCT AUTHORITY DOES NOT REGULATE ESTATE PLANNING, TAX ADVICE, WILLS OR TRUSTS.
INFORMATION IS BASED ON OUR CURRENT UNDERSTANDING OF TAXATION LEGISLATION AND REGULATIONS. ANY LEVELS AND BASES OF, AND RELIEFS FROM, TAXATION ARE SUBJECT TO CHANGE.