Inheritance Tax Planning

Inheritances tax is not just for the rich

With the mention of Inheritance Tax, most people simply dismiss the possibility that their estate could ever be liable, assuming it is a tax paid only by the rich…

…this is far from the truth.

Take a moment to add up the value of all your assets - your home, personal possessions, savings, investments, life assurance and even your car…

…if this adds up to more than £325,000 - on your death, the taxman will deduct 40% tax from the value of any assets over this figure that you will pass on!.

So, as you can see - this is a very real tax and can effect more people than it would first appear - and at a rate of 40% for everyone, it can be very costly for those inheriting.

Assessing your Inheritance Tax liability

The inheritance tax Nil Rate Band stands at £325,000 for the 2023/2024 tax year, which basically means that if the value of your estate (all your possessions, including your house) exceeds £325,000 - then your heirs may have to pay tax on everything above this at a rate of 40% when you die.

Your house is the most obvious asset, but there may be many others, for example savings and investments, pensions, jewellery, collectibles, as well as other items of value you own including a business. In addition, there are other items which may be chargeable to IHT which you need to consider.

You can also transfer unused Inheritance Tax threshold (or ‘nil rate band’) from previously deceased spouse of civil partner which theoretically means up to £650,000 could be currently possible. 

This guide explains how to apply the additional threshold to an estate for most circumstances. But there are some basic rules to follow to see if an estate qualifies for the additional threshold, which is sometimes known as the residence nil rate band or RNRB.

HM Revenue and Customs (HMRC) can’t:

  • give tax planning advice
  • comment on what someone should do to take advantage of the additional threshold
  • explain what someone’s entitlement to the additional threshold or tax position will be in the future

In some less straightforward situations you may want to get professional advice about:

  • how to work out the additional threshold
  • the effect of the additional threshold on the Inheritance Tax (IHT) liability
  • what action you need to take to make sure that an estate qualifies for the additional threshold

You can also use the additional threshold calculator to work out how much additional threshold the estate may be entitled to.

When the additional threshold applies

An estate will be entitled to the additional threshold if:

  • the person dies on or after 6 April 2017
  • the person owns a home, or a share of one, so that it’s included in their estate
  • their direct descendants such as children or grandchildren inherit the home, or a share of it

For estates valued at more than £2 million, the additional threshold (and any transferred additional threshold) will be gradually withdrawn or tapered away.

An estate may also be entitled to the additional threshold when an individual has downsized to a less valuable home or sold, or given away their home after 7 July 2015.

Additional threshold amounts

The maximum available amount of the additional threshold will increase yearly.

For deaths in the following tax years it will be:

  • £100,000 in 2017 to 2018
  • £125,000 in 2018 to 2019
  • £150,000 in 2019 to 2020
  • £175,000 in 2020 to 2026

For later years, the maximum additional threshold will increase in line with inflation (based on the Consumer Prices Index).

Unused additional threshold

Any unused additional threshold when someone dies can be transferred to the deceased’s spouse or civil partner’s estate. This can also be done if the first of the couple died before 6 April 2017, even though the additional threshold wasn’t available at that time.

Although you don’t need to make a formal claim for the additional threshold, you’ll need to give details of the amount due and supporting information on the IHT return following a death. You’ll need to make a claim to transfer any unused additional threshold from the estate of a late spouse or civil partner. You’ll also need to make a claim for any additional threshold as a result of downsizing or disposal of the home before death.

The additional threshold only applies to the estate of a person who’s died. It doesn’t apply to gifts or other transfers made during a person’s lifetime. This includes gifts that become taxable because they’ve been made within 7 years of a donor’s death.

Where someone gives away their home and continues to benefit from it, for example, by living in the property, HMRC treats that home as being included in the estate. So the additional threshold may be available for that home if it’s given away to a direct descendant.

How to calculate and apply the additional threshold

The additional threshold applies in addition to the basic Inheritance Tax threshold (sometimes known as nil rate band or NRB and currently it’s £325,000) if the individual and estate meet the qualifying conditions. The additional threshold doesn’t mean that the home is exempt for IHT purposes but that could be the result of the new rules in some cases.

The amount of the additional threshold due for an estate will be the lower of:

  • the value of the home, or share, that’s inherited by direct descendants
  • the maximum additional threshold available for the estate when the individual died

You should add any transferred additional threshold from a late spouse’s or civil partner’s estate to the amount of the additional threshold due for an estate. You set the combined additional threshold against the value of the estate first.

You then set the basic Inheritance Tax threshold (and any transferred basic threshold) against the remaining value of the estate. In many cases the order that you apply the additional threshold and basic Inheritance Tax threshold will make no difference. But in some cases it will affect the amount of any unused additional threshold or basic threshold available for transfer to a spouse or civil partner’s estate.

How do I mitigate Inheritance Tax?

There are now many options to help you reduce or even eliminate your potential inheritance tax liability altogether and as every bodies circumstances are different,effective inheritance tax planning requires a tailored solution, which is where we can help.

There are a number of basic steps you can take to secure your family's inheritance:

  • Order your finances tax–efficiently
  • Make a Will
  • Value your assets
  • Transfer assets
  • Understand your pension death benefits

So, if you want to ensure that your assets go to the people or charities you want them to go to, you need to plan your inheritance carefully and as Independent Financial Advisers, we can explain what the best options are for your individual circumstances.

Points to consider

  • How much inheritance tax would your estate have to pay if you were to die today?
  • What legacy do you intend to leave behind for those who follow?
  • Have you used all of your inheritance tax exemptions?
    Does your Will make the best use of the inheritance tax provisions?
  • How sure are you that any gifts you have made to avoid inheritance tax are effective?
  • Do you wish to mitigate inheritance tax but need your investment income?

So, if you feel you could be liable for IHT, independent financial advice could save your estate and your heirs a great deal of money.

Contact us now for a confidential discussion.