Inheritance Tax (IHT) is a complex and often misunderstood area of personal finance. For many people, it’s something that’s only considered once a loved one has passed away, but understanding IHT in advance can help you manage your estate more efficiently and ensure that more of your wealth is passed on to your beneficiaries.
What is Inheritance Tax (IHT)?
Inheritance Tax is a tax on the estate of someone who has passed away. It’s charged on the value of everything they own, including their property, savings, investments, and personal belongings. If the total value of their estate exceeds a certain threshold, IHT is applied to the amount above that threshold. The standard rate of IHT is 40% on the value over this threshold.
The Nil-Rate Band
The most important figure to know when it comes to IHT is the Nil-Rate Band. This is the amount you can leave to your heirs without incurring any IHT. The Nil-Rate Band is £325,000. This means that if the total value of your estate is worth £325,000 or less, your estate won’t be subject to IHT. If the estate is worth more than this, the amount over £325,000 will be taxed at 40%.
For married couples or civil partners, the Nil-Rate Band is transferable. This means that if one partner dies and doesn’t use up their Nil-Rate Band, the surviving partner can inherit the unused portion, potentially doubling the Nil-Rate Band to £650,000.
Residence Nil-Rate Band (RNRB)
For those passing on their family home to direct descendants (such as children or grandchildren), there is an additional relief known as the Residence Nil-Rate Band (RNRB). This was introduced to help families avoid IHT on the family home, which can be one of the largest assets in an estate.
A married couple that qualify for the residence nil rate band could benefit from an IHT free allowance of up to £1 million.
How to Plan for IHT
The key to minimizing IHT is early planning. If you know your estate may be subject to IHT, there are several strategies you can consider. To find out more about how we can help you with Inheritance Tax view our estate planning pages.
It is crucial to regularly review your estate plan, especially if your circumstances change or if the IHT thresholds are adjusted.
Final Thoughts
Inheritance Tax can be a significant financial burden on your beneficiaries if not properly planned for. However, with careful planning, understanding the available exemptions, and utilising strategies , it’s possible to reduce the amount of IHT that applies to your estate. As IHT rules can be complicated and subject to change, seeking professional advice is essential to ensure that your estate plan aligns with your goals and minimises any tax liabilities.
Estate Planning and Inheritance tax are not regulated by the Financial Conduct Authority.