Available allowances
Inheritance tax is usually charged at 40% of the chargeable estate in excess of the ‘nil-rate band’ (£325,000 for 2022/23). Unused nil-rate band can be passed to a surviving spouse, so married couples can utilise a combined allowance of £650,000.
Along with the above, the residence nil-rate band (RNRB) was introduced in April 2017, which provides an additional relief where the main residence is passed to a direct descendant upon death. This is also transferrable to a surviving spouse, if not fully utilised. The RNRB is currently set at £175,000 up until 2025/26, such that a married couple could feasibly transfer £1m to their descendants free of inheritance tax. Having said that, there are conditions which must be met to qualify for the RNRB, which can lead to the unwary losing a tax saving that is worth £70,000 per individual.
Other planning
There are several planning opportunities available when looking at ways to reduce your chargeable estate and the IHT due:
- Everyone can give away £3,000 per tax year without triggering a charge to IHT.
- Small gifts of £250 can be given to any number of people per tax year.
- Parents can make wedding gifts of £5,000 to each of their children, whilst grandparents can give £2,500 and anybody else can gift £1,000.
- Regular gifts can also be made free of inheritance tax if they are made out of your income and they do not affect your normal standard of living. It can be a tricky task to determine whether a gift affects your normal standard of living so we would recommend that professional advice is sought if you are considering making such gifts.
Depending on your circumstances, more sophisticated tax planning may be recommended, such as transfers into trusts or investing in assets qualifying for Business Relief. If cashflow for the estate is a concern (perhaps the estate is made up of illiquid assets so paying the IHT could require asset sales) a life insurance policy can be created to pay some or all the tax due.
To summarise
IHT is a tax that should be considered and planned for in the long-term, in much the same way as we do income tax or corporation tax matters. The savings could be significant and forward planning helps to maximise the wealth passing to the next generation.
If you would like a review of your current estate and to consider the potential planning opportunities available to you specifically, please get in touch and one of our expert teams will be happy to assist.
