Inheritance tax, or IHT as it is commonly known, is payable on everything you have of value when you die, including:
- Your home
- Savings and investments
- Jewellery, works of art and cars
- Any other properties or land – even if they are overseas
It is usually payable on death. But there are certain circumstances when Inheritance Tax becomes payable earlier, for example, if you pass assets to certain types of Trusts.
Inheritance Tax allowances
Inheritance Tax is normally charged at 40% of the value of your estate above a certain amount, known as the Inheritance Tax threshold or nil-rate band, which is £325,000 for the 2023/24 tax year.
However, married couples can combine their Inheritance Tax thresholds, meaning that up to the first £650,000 of their combined estate is Inheritance Tax-free, as any unused nil-rate band can normally be passed on to the surviving spouse.
In addition to your nil-rate band, in April 2017 an extra allowance was introduced when the main residence is passed to a ‘direct descendant’. This is known as the Residence Nil Rate Band (RNRB), and as the standard nil-rate band, unused elements of the allowance are transferable to a surviving spouse or registered civil partner. The RNRB for the current 2023/24 tax year (and up until 2025/26) is £175,000 per person.
This means that a married couple with children can potentially pass on up to £1 million – two lots of £325,000 (£650,000) and two lots of £175,000 (£350,000) – without having to pay Inheritance Tax if the second death occurred this tax year.
Inheritance Tax planning
If you believe that there could potentially be an Inheritance Tax liability in the event of your death. There are many planning options that you could consider to mitigate any potential Inheritance Tax liability.
- Gifts – If you do not require the capital, each year you can give away £3,000, and that gift will not be subject to Inheritance Tax. You can also give £250 to any number of people each year. Parents can give £5,000 to each of their children as a wedding gift, whilst grandparents can give £2,500 and anyone else £1,000 for wedding gifts. Gifts of any size to charities or political parties are also tax-free. If a gift is regular, comes out of your income and does not affect your standard of living, any amount of money can be given away and ignored for Inheritance Tax. It is possible to make further tax-free gifts – potentially exempt transfers – but you have to survive for seven years after making the gift to get the full benefit of it being outside of your estate for Inheritance Tax purposes.
- Trusts – You can move capital/assets out of your estate and gift them into Trusts which can reduce an Inheritance Tax bill and give you control over how your assets are used by future generations. Gifting into a Trust is a complex matter and it will take up to seven years to fully remove the capital from your estate.
- Pensions – Pensions are one of the most tax-efficient ways to pass on your wealth, as capital within pensions will fall outside of your estate. If you pass away before the age of 75, benefits left in a money purchase pension can be paid as a lump sum or drawdown income to any nominated beneficiary, with absolutely no tax to pay. If death occurs after the age of 75, whilst still passing on Inheritance Tax-free, any future withdrawals will be taxed at the beneficiaries’ marginal income tax rate. It therefore might make sense to use other investments, such as Individual Savings Accounts (ISAs), to provide a retirement income and retain funds in your pension for as long as possible.
- Specialist investments – Some investments can qualify for Business Relief (BR) which allows for the investment to be exempt from Inheritance Tax after being held for more than two years. Several shares listed on the Alternative Investment Market (AIM) qualify for BR and Enterprise Investment Schemes (EISs) also benefit from BR. These Investments are high-risk and not suitable for everyone. At Nelsons, we can recommend schemes that have a track record of managing successful portfolios of assets that qualify for BR.
- Life assurance – Life assurance can be used to either meet or reduce a prospective Inheritance Tax bill. You set up what is called a whole-of-life assurance policy, which lasts for as long as you live. The sum assured from the policy is then paid to your beneficiaries to pay some or all of the Inheritance Tax due. As long as the policy is written in a Trust, the proceeds of the life assurance policy should not be included in your estate. Regular reviews are essential to ensure the cover keeps in line with any increases in the value of your estate.
Inheritance Tax planning can be complicated and there is a fine balance between ensuring you have sufficient assets to cover you for life and minimising the potential Inheritance Tax liability that your beneficiaries could pay in the event of your death.
How can we help?
Zoe Till is a Partner and Chartered Financial Planner in our expert Investment Management team. Zoe’s areas of expertise include investment advice, retirement planning, Inheritance Tax and lifetime cash flow modelling.
If you would like any advice in relation to the subjects discussed in this article, please get in touch with Zoe or another member of the team in Derby, Leicester, or Nottingham on 0800 024 1976 or via our online form.
Contact us