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Inheritance Tax (IHT) can be a concern for many as you will want to maximise the amount passed down to your loved ones and ensure that your assets and property retain their value.
The amount your loved ones will receive from your estate will be impacted by IHT if it surpasses certain thresholds in its value and it is difficult to know how to mitigate these costs without reducing your estate size in some way.
Here, Rachel Blackburn, Mander Hadley’s Head of Wills, Probate and Older Client Services, explains when IHT is payable, who is liable to receive a tax bill and what can be done to reduce the effects on your valuable legacy:
How does Inheritance Tax work?
Inheritance Tax applies on the estate of someone who has died when at least part of the estate exceeds the tax-free threshold of £325,000 (now frozen until April 2028). This usually consists of property, investments and general savings.
The Inheritance Tax rate is 40 per cent, charged on any of the estate that exceeds £325,000.
However there are many exceptions to this, so it is important to understand if you will be charged IHT on your estate by calculating the value regularly.
If you believe your estate surpasses the threshold of IHT and your beneficiaries will be charged IHT after you have passed away, it is important to understand what they will pay and if there are any ways to plan for this and mitigate the costs in any way.
Understand the value of your estate in advance
Having an accurate idea of your estate value will help you to understand how much Inheritance Tax your beneficiaries are likely to pay.
Remember to account for any debts and funeral expenses when you are working out your estate’s value. It is also beneficial to review this regularly, as the value of your estate is likely to increase over time.
Leaving your property to your spouse/civil partner
If your property is left to your civil partner or spouse, they will not pay any IHT and this is applicable across all assets you leave to your spouse or civil partner.
However, if you leave the property to anyone else in your Will, then they may have to pay IHT, if the estate surpasses the threshold.
Residence nil-rate band
If you own a property, you can apply an additional IHT allowance to the threshold of £325,000. This means that the overall allowance can be increased up to £500,000 but you must meet certain criteria for this.
You must leave the house to a direct descendant, like your children, grandchildren, stepchildren, adopted children and foster children.
If the value of your estate surpasses £2 million, then RNRB is tapered.
RNRB decreases by £1 for every £2 that your estate is above £2 million.
Should your property be worth less than £175,000, then you are only allowed to claim the additional allowance up to the value of your property.
If you leave your entire estate to a spouse, then on their death they are allowed to use your nil rate band of £325,000 and increase their nil rate band allowance to £650,000.
Similarly with the RNRB, if this is unused, your spouse will have £350,000 added to their tax-free allowance. This is largely only useful if your property is worth £350,000 or more.
We understand that your estate value and ensuring it gets passed down to your loved ones is highly important.
We can guide you through the process of leaving your estate to your loved ones and help with any queries you may have.
For more information about estate planning and IHT, please get in touch with us.