When we die, we all would prefer to leave as much of our wealth to our beneficiaries as possible. Even with a detailed Will outlining our intentions, Inheritance Tax (IHT) can substantially reduce the amount our beneficiaries actually receive.
However, by planning ahead, there are ways to reduce the Inheritance Tax paid by your Estate…
If you are a UK Domicile, IHT is a tax on money or possessions you leave behind when you die, and on some gifts you make during your lifetime. Your estate is the total value of your assets (property, car, bank accounts, investments etc.), including those given away in the seven years prior to death, less any outstanding bills, debt or funeral expenses.
Inheritance tax allowance
The tax-free IHT tax allowance is currently £325,000. Above this ‘Nil Rate Band’, tax of 40% is usually payable. If you are married or in a registered civil partnership IHT rules allow partners to pass their possessions and assets to each other tax-free and, since October 2007, the surviving partner is now allowed to use their own tax free allowance and any of the balance of the nil rate tax band not used on the death of their partner. This has the potential to effectively double the amount the surviving partner can leave behind tax-free without the need for special tax planning.
Main Residence Nil Rate Band
Those who own their home also have an additional IHT relief, the Main Residence Nil Rate Band. From April 2020 this will provide a further £175,000 to each individual that could reduce the IHT liability on your estate. This relief has a number of rules and restrictions, it’s therefore important to understand them to make sure you don’t miss out.
Making a gift
As well as on your estate at death, IHT may also be payable on gifts you make during your lifetime, especially if you die within seven years of making the gift. The laws are strict in which constitutes a “gift” and what doesn’t and they fall into four basic categories:
- Always tax-free irrespective of when you make them
- Potentially tax-free
- Taxable, but no tax due at the time the gift is made
- Taxable, and tax is paid at the time the gift is made
When a person dies without leaving a valid Will, the estate must be shared out according to certain rules known as the rules of intestacy.
If you don’t have a Will, you should strongly consider making one – it might seem like a morbid task that you don’t wish to consider, but ensuring that you don’t die intestate will give you the peace of mind of knowing that your loved ones will be taken care of after you are gone.
It is possible to substantially reduce the amount of IHT applied to your estate through careful planning and understanding of the rules that apply to Inheritance Tax and the various Nil Rate Bands. Whether through use of gifts, Business Property Relief Trusts or understanding the wider options when planning, IHT can be reduced.
Our team of Independent Financial Advisers can help you understand and build a plan to help you make the most of your allowances and planning options available to you, ensuring as much of your estate as possible could pass to your beneficiaries.
Please note that when discussing or reviewing your financial situation we will need to conduct a fact find in order to fully understand your goals and objectives. This will provide us with the necessary information upon which to base any recommendations and ensure they meet your objectives and wider financial planning needs.
This information is based on Lloyd & Whyte (Financial Services) Limited’s understanding of current legislation and HMRC Guidance at the time of print which may change. It does not constitute legal or tax advice and must not be treated as such. Whilst every effort has been made to ensure that the information is correct, we cannot accept responsibility or liability for any omission or inaccuracy provided in this document.