Inheritance Tax (IHT) is a tax on the estate of someone who has passed away. It is charged on the value of their assets, such as property, savings, investments, and other possessions, once debts and funeral expenses have been paid. The tax is typically paid by the beneficiaries of the estate, but in some cases, the estate itself is responsible for settling the liability before distributing the inheritance.
Why Inheritance Tax Planning Advice Matters
Effective Inheritance Tax Planning Advice can help individuals and families reduce their IHT liability, ensuring that more of their estate is passed on to loved ones. By understanding key exemptions, reliefs and planning strategies, it’s possible to structure an estate in a tax-efficient manner, minimising the impact of IHT while staying compliant with UK tax laws.
In the UK, the standard threshold for Inheritance Tax is £325,000.00 (the nil-rate band).
If the value of the estate exceeds this threshold, IHT is charged at a rate of 40% on the amount above it.
For example, if the estate is worth £500,000, IHT will be applied to £175,000.00 (£500,000.00 – £325,000.00), which is £70,000.00 in tax.
The Nil-Rate Band
The nil-rate band is the amount of an estate that can pass on tax-free. As of 2023, this is £325,000.00. Estates below this threshold are not subject to IHT. If the estate is worth more than this amount, only the portion above £325,000.00 is taxed.
Residence Nil-Rate Band (RNRB)
If a person leaves their family home (or part of it) to direct descendants, such as children or grandchildren, they may benefit from an additional tax-free allowance called the residence nil-rate band. This is currently £175,000.00, and it can be added to the basic nil-rate band, effectively increasing the threshold to £500,000.00 for individuals.
Gifts and Exemptions
Certain gifts and transfers made during a person’s lifetime may be exempt from IHT. For example, you can give away gifts worth up to £3,000.00 per year without incurring tax, and gifts to charities or political parties are completely exempt.
Spouse and Civil Partner Exemption
Transfers between spouses or civil partners are generally exempt from IHT, meaning that assets can be passed on without incurring any tax.
Inheritance Tax can be a significant concern for those with larger estates, but there are various ways to reduce its impact. Common strategies include making gifts during your lifetime, investing in tax-efficient products, or setting up a trust. Understanding the exemptions and reliefs available, along with effective estate planning can help reduce the amount of IHT owed, ensuring more of your estate is passed on to loved ones.
If you have any questions regarding inheritance tax please get in touch with our team of qualified financial advisers for a no obligation chat.
The UK Office for Budget Responsibility forecast is that in the 2024-2025 tax year Inheritance Tax will raise £8.3 billion for the Treasury.
If inheritance tax is owed on an estate and it’s not paid, HMRC can charge interest and penalties. The tax must be paid within six months of the date of death, and failure to do so can lead to legal action and additional charges.
Gifts made during your lifetime can reduce the value of your estate for IHT purposes. Some gifts are exempt, such as small annual gifts or gifts to your spouse. If you give a gift and live for at least seven years after giving it, it’s generally exempt from IHT under the seven-year rule.
The 7-year rule refers to the exemption of gifts made more than seven years before your death from inheritance tax. If you survive for at least seven years after making a gift, it is generally not subject to IHT. However, gifts made within seven years may be subject to tax, with a tapering relief if you survive between 3 and 7 years.
Yes, leaving money to charity can reduce your inheritance tax bill. If you leave at least 10% of your estate to charity, you may qualify for a reduced inheritance tax rate of 36% instead of the standard 40% on the rest of your estate.
Estate planning is the process of arranging how your assets (such as property, money, and possessions) will be managed and distributed after your death.
It’s important because it ensures your wishes are followed, reduces inheritance tax liabilities and helps prevent disputes among beneficiaries. It can also include making arrangements for your long term care if you become unable to make decisions yourself.
Yes, you can gift assets before death, and some gifts may be tax-free if you live for at least seven years after making them (known as the seven-year rule). Smaller gifts may also be exempt from inheritance tax.
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