Senior solicitor Louise Nelson, in our leading Wills, Probate, Tax & Trusts team, explains when Inheritance Tax (IHT) is payable by an estate.
Inheritance Tax (IHT) accounts for under 1% of the Government’s annual tax take, yet it is perhaps one of the most debated and disliked forms of taxation and one that can have a significant impact on the beneficiaries of an estate.
Between 2014/15 and 2018/19, the amount of Inheritance Tax collected by HMRC rose by 42%, to £5.36 billion. The Nil Rate Band (NRB) threshold is currently fixed at £325,000 for individuals and IHT is charged at a rate of 40% on estate values in excess of the threshold (where no exemption applies). Any unused allowance can be transferred to a surviving spouse, which means married couples can collectively bequeath £650,000 tax-free.
In addition, where an individual is passing on their main residence to direct descendants (including their child(ren) or grandchild(ren)), the Residence Nil Rate Band’ (RNRB), introduced in 2017, provides a tax free allowance of £175,000 per person which is also transferable between married couples and civil partners. This means that, for some people, no Inheritance Tax will be charged on the first £500,000 of their estate (£325,000 + £175,000).
The key to lessening tax liabilities is to begin planning as early as possible. It is another misconception that Inheritance Tax planning is only for the elderly. Unless you take early steps, the major beneficiary of your estate could be HMRC.
Where appropriate, incorporating discretionary trusts in your Will can maximise any Inheritance Tax reliefs that may be available. Some trusts are particularly useful for unmarried couples where the ‘Spouse Exemption’ is not applicable.
Other methods of Inheritance Tax planning include:
- Making use of annual lifetime gift exemptions.
- Making gifts during your lifetime which may be exempt from Inheritance Tax if you survive a further seven years.
- Financial services packages (e.g. life policies) designed to cover your liability.
- Gifts to charities under your Will.
For further information or legal advice, please contact firstname.lastname@example.org or call 0118 951 6800.
This article is intended for the use of clients and other interested parties. The information contained in it is believed to be correct at the date of publication, but it is necessarily of a brief and general nature and should not be relied upon as a substitute for specific professional advice.