Understanding inheritance tax (IHT) is crucial to effectively managing and passing on your assets to the next generation.
With effective IHT planning, you can effectively cut the tax levied on your estate, meaning more money for your heirs and less for HMRC – and who wants to pay more tax than they need to?
Let’s investigate how much inheritance tax you might have to pay.
What is Inheritance Tax (IHT)?
IHT is a tax applied to an individual’s estate, including their property, money and possessions, after they have passed away.
The IHT threshold, known technically as the ‘nil-rate band’, determines the extent to which an estate is liable for IHT.
For the 2023/24 tax year and the foreseeable future, this threshold is set at £325,000. This means if the estate’s total value falls below this amount, it is exempt from IHT. Any amount over this threshold is taxed at a standard rate of 40%. However, this threshold can be increased under certain conditions, reducing the tax bill.
Residence nil-rate band
The residence nil-rate band (RNRB) is an IHT tax allowance designed specifically when a family home or a main residence is passed down to direct descendants, such as children or grandchildren, following the homeowner’s death.
For the 2023/24 tax year, the RNRB stands at £175,000. This means that if you pass down your residence to your direct descendants, an additional £175,000 of the property’s value is exempted from Inheritance Tax, on top of the standard nil-rate band.
The standard nil-rate band is a separate allowance exempting the first £325,000 of your estate from IHT. This includes all your assets like cash, investments, properties, and personal belongings.
When combined with the RNRB, an individual can potentially shield up to £500,000 of their estate from IHT.
Other reliefs and exemptions
Aside from the residence nil-rate band, several other reliefs and exemptions can help to reduce the IHT bill. Two of the main exemptions are:
- Spouse or civil partner exemption: If you leave everything above the IHT threshold to your spouse or civil partner, your estate won’t owe any IHT. Additionally, any unused threshold can be transferred to your partner upon your death, potentially doubling their threshold for when they pass away.
- Charity exemption: Any money left to a charity is free from IHT; if you leave at least 10% of your net estate to charity, it can reduce the IHT rate on some assets from 40% to 36%.
Gifts and their impact on IHT
Gifts made to loved ones during your lifetime can also play a part in IHT calculations.
Most gifts made seven or more years before your death are IHT-free. However, IHT could be due on gifts if you die within seven years of making one.
Gifts to your spouse or civil partner, charities and political parties are exempt from IHT, even if you make them within seven years of your death.
For a detailed understanding of how different types of gifts impact IHT, the Government’s IHT guide provides a comprehensive overview.
Be proactive and plan ahead
Proactive estate planning is key to minimising the IHT bill and ensuring more of your assets end up in the hands of your loved ones. There are several strategies to consider:
- Write a will: Ensure your assets are distributed according to your wishes.
- Make use of gift allowances: Understand and utilise annual IHT-free gift allowances.
- Consider trusts: Placing assets in a trust can effectively manage and protect your wealth.
- Take out life insurance: A life insurance policy can be used to cover the IHT bill.
- Seek professional advice: Estate planning can be complex, but you don’t have to navigate it alone. Professional assistance can help you effectively leverage exemptions and reliefs.
How SD Consulting can help
By understanding IHT rules, using allowances, and seeking professional advice, you can take control of your financial future and preserve your legacy.
Understanding and planning for IHT can seem overwhelming, but it doesn’t have to be. At SD Consulting, we offer direct, bespoke advice to help you navigate the IHT landscape.
Our team of chartered accountants is well-versed in IHT and is here to help you devise a plan that ensures your assets are protected and passed on according to your wishes.
Contact us now for advice on your inheritance tax.