Wonderful service from start to finish.
Inheritance Tax Planning - the five considerations to reduce inheritance tax
- AuthorSue Nicholson
In the recent Budget, Chancellor Rishi Sunak announced that the inheritance tax threshold will be frozen until 2026, despite the fact that property and other asset prices continue to rise. This means therefore that more people will fall above the current threshold set and so inheritance tax will be payable, unless you undertake appropriate estate planning to minimise this. Sue Nicholson, Partner in our Private Client department, explains more here about the current threshold and the main ways that you can reduce the risk of inheritance tax being payable on your estate.
What is the inheritance tax threshold?
The inheritance tax threshold refers to the amount your estate is worth upon your death. While it is a complex calculation, essentially your estate is valued based upon everything you own from your cash savings, property, businesses, investments, possessions, vehicles, insurance policies etc, set against outstanding payments. It is this figure that is then taxable and anything above the inheritance tax threshold is taxed at 40%. Currently this threshold, known as the nil-rate band, allows your beneficiaries to inherit up to £325,000 without incurring this tax payment.
There is an additional threshold called the residence nil-rate band, which applies if you are leaving property to a direct descendant. Currently this band stands at £175,000, allowing you to pass property that you have lived in to your children, grandchildren, step-children, adopted children and foster children tax free.
Under normal circumstances, the residence nil-rate band would increase each year, however it was announced in March 2021 that the IHT thresholds would be frozen until 2026.
“During the Covid-19 pandemic, we have seen property prices rise as more people wish to take advantage of the Stamp Duty holiday and so an increase in demand,” Sue explains. “Even if you are not planning on selling your home, you may not be aware that the value of your property has risen to above the threshold, which is why regularly reviewing your plans for your estate is vital to avoid the risk of a hefty tax bill for your beneficiaries.”
What should I consider when reviewing my inheritance tax plans?
- Are you able to combine your allowances with your spouse?
Married couples are able to combine their nil rate bands and their residence nil-rate band upon their death, meaning that your estate may avoid inheritance tax being payable by your beneficiaries up to an estate value of £1 million.
- Making a gift to loved ones to reduce the size of your estate
Gifting cash, property or savings during your lifetime can lead to a smaller estate and so you could fall under the required threshold. If, however, you make this gift and then pass away within seven years of making said gift, inheritance tax may then be payable by the recipient. This will all depend on the type of gift and the value, with each type of gift having their own set of restrictions.
There are certain gifts that can be made that are exempt from these rules, such as annual gifts of £3,000 per year, small gifts up to £250 per year, wedding gifts up to £5,000 and other gifts outside of surplus income. As with all areas of inheritance tax planning however, there are conditions that must be adhered to in order to make these gifts lawfully and reduce the inheritance tax payable.
- Would a Trust be a tax efficient way to manage your estate?
There are several different options when moving your assets into a Trust, whether that is in the form of a Life Interest Trust or a discretionary Trust. A Trust essentially allows you to ring-fence money or assets outside of your estate with you having the ability to manage that asset and determine who will benefit and when.
- Pension planning and inheritance tax
Pensions are usually exempt from inheritance tax as they are not included as part of your estate and so could be passed to a beneficiary. This will be dependent on several factors including:
- the type of pension it is,
- who you are planning on leaving your pension to and whether you have told your pension provider of your intentions, and
- your age at the time of your death.
- Leaving money to charity
There are certain charities where a gift left to them in your Will could be exempt from inheritance tax. Additionally, should you leave at least 10% of the value of your estate that surpasses the nil-rate bands to charity, you could reduce the inheritance tax rate due on the remainder of your estate from 40% to 36%.
“It’s never too early to start planning for your future,” concludes Sue. “While some of what we explain here may seem straight forward, in reality there are many restrictions and stipulations. We regularly see people come to us following the death of a loved one who are faced with significant tax bills which can have been reduced with planning. Making these types of arrangements isn’t just for the benefit of your loved ones in the future, but can also ensure you have enough money to live on during your lifetime. Understanding your rights and making decisions sensibly can be complex, particularly if you have a large estate, which is why it is always prudent to receive legal advice from experienced estate planners who can advise accordingly and prepare for any eventuality.”
To discuss your inheritance tax plans with Sue or a member of the Private Client team, you can call today on 01329 222075 or email firstname.lastname@example.org.
This is for information purposes only and is no substitute for, and should not be interpreted as, legal advice. All content was correct at the time of publishing and we cannot be held responsible for any changes that may invalidate this article.