It is inevitable that at some point you will have to deal with your estate or the estate of others and with this in mind, it is important that you plan to reduce the impact of Inheritance Tax on your beneficiaries.
No one wants their wealth taxed when it is passed to the next generation, so it is important to take action earlier in our lives to prevent it.
Will my family have to pay Inheritance Tax?
An estate is liable to IHT where the value exceeds the Nil Rate Band (fixed at £325,000 until April 2026).
There is an exemption from Inheritance tax when assets or cash are left to a spouse or civil partner of the deceased or a Charity.
IHT is charged on estates at the following rates:
- Below the nil-rate band allowance of £325,000, the rate of tax is 0 per cent.
- Above it is charged at 40 per cent or 36 per cent where 10% of the chargeable estate is left to charity.
Transfer of spouse’s nil-rate band
In addition to a deceased’s own nil-rate band of £325,000, if they have survived their spouse or civil partner, the estate may take advantage of the unused percentage of the previously deceased spouse’s or civil partner’s nil-rate band. This combined allowance can total up to £650,000 across both estates.
Residence nil-rate band
Where the deceased leaves their home to their children, stepchildren, or direct descendants, their estate can also benefit from an additional residence nil-rate band (RNRB) of £175,000.
This is also fixed until April 2026.
Additionally, the allowance can be transferred to a surviving spouse or civil partner, meaning that a couple can pass on up to £1 million tax-free.
The allowance starts to be withdrawn where the value of the estate immediately before death exceeds the £2 million taper threshold. The allowance is withdrawn by £1 for every £2 of value, by which the estate exceeds the taper threshold. This means that there will no allowance left on a joint estate worth £2.7 million.
Inheritance Tax planning
With personal tax allowances not due to increase until April 2026, the need to consider Inheritance Tax planning is more important than ever. With the increase in property values, more estates than ever are falling into the Inheritance Tax net.
We can provide tax planning advice in connection with the use of trusts, lifetime gifts, exemptions available on qualifying business assets, farmland, and certain tax-efficient investments.
To find out how you can pass more to the next generation, speak to our specialists today.