With HM Revenue & Customs (HMRC) revealing that Inheritance Tax (IHT) receipts increased by £200 million from April to July 2023, it’s a reminder of the importance of estate planning if you anticipate an IHT bill in the future.
IHT is levied on the assets, property, and money of a deceased individual, is an essential aspect of estate management.
If the estate is valued below the nil-rate band threshold of £325,000, or if all assets beyond this allowance are transferred to the deceased’s spouse or civil partner, there is generally no tax liability.
The residence nil rate band may modify the IHT rate for those who qualify. In cases where the primary residence is left to a direct descendant, the threshold could rise by £175,000, extending up to £500,000. Similar to the provisions of the standard nil-rate band, this increase can be applied jointly with a spouse or civil partner, which means that a couple may leave up to £1 million without being subject to tax.
Generally, IHT is charged at 40 per cent over these thresholds, but this rate can vary depending on other factors, such as if a proportion of the estate is left to charity.
The following strategies can help you mitigate the impact of IHT on your estate:
The importance of Wills: Regularly reviewing and updating your Will, particularly after significant life changes, is an indispensable component of estate planning.
Utilising lifetime gifting: Leveraging HMRC’s IHT tax incentives through lifetime gifting is a practical approach. These gifts can range from money, property, personal possessions, to shares. It should be noted that transactions significantly below market value might also be categorised as gifts.
Understanding gifting allowances: Various allowances apply to different types of gifts, such as general gifts, small gifts, and those given for weddings, civil partnerships, birthdays, and Christmas.
Implementing trusts: Several types of trusts, including bare trusts, interest in possession trusts, and trusts for bereaved minors or disabled beneficiaries, may enable IHT savings, given the fulfilment of specific criteria.
Charitable donations: Leaving a charitable donation within your Will may reduce the overall taxable value of the estate.
It should also be noted that lifetime gifts made fewer than seven years prior to death will be factored into the estate’s value.
Estate planning can be challenging, but if you anticipate that your estate will be subject to IHT, being aware of these principles is essential.
Need advice on tax planning for your estate? Contact us today.