If you thought Inheritance Tax was just for the extremely wealthy to worry about, think again.
Rising property prices have meant more estates than ever are likely to face an Inheritance Tax bill, with The Office for Budget Responsibility forecasting that Inheritance Tax will raise £7.2 billion* this financial year and as much as £8.4 billion by 2027/28.**
The good news is that there are plenty of things you can do to increase your tax efficiency, but finding the right options for you will depend on your personal circumstances.
What is Inheritance Tax?
Inheritance Tax is a tax on the estate of someone who has died, including all property, possessions, and money.
There’s normally no Inheritance Tax to pay if either:
- The value of your estate is below the £325,000 Nil Rate Band threshold
- You leave everything above the £325,000 threshold to your spouse, civil partner, a charity, or a community amateur sports club
What is Inheritance Tax planning?
Inheritance Tax planning is a necessary part of your Tax Planning journey. However, by planning ahead, you can potentially save your family thousands of pounds in Inheritance Tax when you die and ensure that your wealth in preserved for future generations.
How can you reduce your Inheritance Tax bill?
- Through careful planning
- Maintaining an up-to-date will
- Seeking professional advice
- Lifetime gifts
- Trusts
The various solutions have different timescales and risk profiles, so it’s important to speak to one of our specialists to find a solution that’s appropriate for you. If you’re a True Potential client you can call our Relationship Management team on 0191 500 9164. They’re available 7am – 8pm weekdays and 8am – 12pm on Saturdays. If you’re not a client you can call one of our experts on 0191 625 0350 to learn more.
Inheritance Tax rates.
Under current 2023/24 tax rules, Inheritance Tax is currently set at 40% on the part of your estate over the £325,000 Nil Rate Band threshold. For example, if your estate is worth £600,000, only £275,000 of this would be subject to Inheritance Tax as the remaining £325,000 would be within the current Nil Rate Band threshold.
Individuals may also have a further allowance which can be offset against your main residence, this is called the Residence Nil Rate Band (RNRB).
The Nil Rate Band has been set at £325,000 since 2009, with the residence Nil Rate Band in place since 2017. While there is no Inheritance Tax due on any estate valued lower than £325,000 at present, the Residence Nil Rate Band does offer an extra allowance of up to £175,000 if you pass your home to a direct descendent.
It is worth noting that estates worth over £2,000.000 will start to lose the Residence Nil Rate Band, as it reduces at a rate of £1 for every £2 over £2,000,000. The estate can pay Inheritance Tax at a reduced rate of 36% on some assets if you leave 10% or more of the ‘net value’ to charity in your will. The net value is the estate’s total value minus any debts.
What reliefs and exemptions are available.
Certain gifts may be free of Inheritance Tax. Exemptions may apply to lifetime gifts only or in certain cases they may also apply to gifts made on death.
Reliefs.
Business Relief.
Business Relief reduces the value of business property for Inheritance Tax. Any ownership of a business, or share of a business, is included in the estate for Inheritance Tax purposes.
Business owners may receive relief at either 100% or 50%, on some of an estate’s business assets. The relief is available after an ownership period of two years.
Agricultural Property Relief.
You can pass on agricultural property, either during your lifetime or as part of your will, without having to pay Inheritance Tax.
Agricultural property that qualifies for Agricultural Relief is land or pasture that is used to grow crops or to rear animals.
To qualify for Agricultural Property Relief, the land must have been owned and actively farmed for 2 years prior to the transfer or date of death. Alternatively, it must be held for 7 years prior to the transfer or date of death if let to someone else to farm.
There are complex rules associated with both of these reliefs, however, so it is essential that you take advice early to ensure that you qualify.
Exemptions.
Annual exemption.
Everyone has an annual exemption of £3,000. This means you can give away a total of £3,000 worth of gifts each year without them being added to the value of the estate. An unused annual exemption can be carried forward for one tax year only.
Gifts worth less than £250.
You can give as many ‘small gifts’ up to £250 as you want each tax year, so long as you have not used another allowance on the same person.
Gifts between spouses and civil partners.
Gifts between spouses and civil partners are generally free of Inheritance Tax provided that the recipient of the gift is UK domiciled or deemed domicile.
Gifts in consideration of Marriage or Civil Partnership.
You can make the following gifts free of Inheritance Tax on a person getting married or entering into a civil partnership:
- £5,000 if you are a parent
- £2,500 if you are a grandparent
- £1,000 in any other case
What does not normally form part of someone’s estate?
Any assets to which you’re not beneficially entitled should be outside of your estate for Inheritance Tax purposes. This can include small gifts (typically up to £250) and any larger gifts given at least seven years prior to death, along with an ISA Additional Permitted Subscription.
Generally, pension plans do not form part of your estate when you die and are free from Inheritance Tax.
How we can help.
Our qualified financial advisers can review all your accounts and create a bespoke plan that makes the most of your tax allowances, maximising your tax efficiency.
As part of our service, we consider:
- The most tax-efficient options available to you
- Whether you require guaranteed income, for example, through an annuity
- Ways to mitigate a potential Inheritance Tax bill
- Planning ahead to reduce tax on your beneficiaries
- Income, Capital Gains, Corporation, and any other relevant taxes to you
Whether you’re expecting or passing on an inheritance, planning is essential to avoid an unnecessary tax bill. No matter what stage of your investment journey you’re at, we’re here to help you reach your financial goals and recommend the most suitable options for you.
If you’re a True Potential client you can call our Relationship Management team on 0191 500 9164. They’re available 7am – 8pm weekdays and 8am – 12pm on Saturdays. If you’re not a client you can call one of our experts on 0191 625 0350 to learn more.
With investing, your capital is at risk. Investments can fluctuate in value and you may get back less than you invest. Past performance is not a guide to future performance. Tax is subject to an individual’s personal circumstances, and tax rules can change at any time. This blog is for information only and is not personal financial advice.
The Financial Conduct Authority do not regulate, Will Writing, Tax Advice and Estate Planning.
The guidance and/or advice contained within the website are subject to the UK regulatory regime and is therefore primarily targeted at customers in the UK.
*Stat taken from the following source:
**Stat taken from the following source:
https://www.ftadviser.com/your-industry/2023/06/21/iht-receipts-grow-by-0-1bn-as-debate-bubbles/
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