Read more articles in: Blog, Private Client, Rachel Blackburn

Inheritance Tax – What do you need to know?

As the value of property rises and inflation continues across the UK, you might be wondering if this will impact Inheritance Tax (IHT).

With the nil rate band of £325,000 currently frozen until 2026, any estate left behind after death that holds a value higher than this could be liable for IHT depending on the assets it holds.

Inheritance Tax receipts have seen a record high this year, bringing in £3.5 billion for the first half of the 22/23 tax year from April to September. This is £400 million higher than the same time in 2021.

What is IHT and when do you pay it?

Inheritance Tax is a tax on the estate (the property, money and possessions) of someone who’s died.

There is normally no Inheritance Tax to pay if:

The value of your estate is below the £325,000 threshold
You leave everything above the £325,000 threshold to your spouse, civil partner, a charity or a community amateur sports club

Your threshold can be increased if:

You leave your home to your children (including adopted, foster or stepchildren) or grandchildren. This gives the potential of increasing your threshold to £500,000
If you are married or in a civil partnership and your estate is worth less than your threshold, any unused threshold can be added to your partner’s threshold when you die. This means their threshold can be as much as £1 million!

Can anything be done to reduce or lessen the blow of IHT?

Giving gifts of up to £3000

Gifts of up to a total of £3000 per tax year will be tax-free and come under an annual exemption.

This could include payments to help with someone’s living costs, such as a child under the age of 18 or simply Christmas or birthday gifts. You can also gift in addition to the annual allowance, a tax free sum of up to £5000, depending on the relation, to someone who is getting married or having a civil partnership.

Any gifts of £3,000 or more in a single year could be subject to the seven year rule. This would result in these other gifts counting towards the value of your estate, and you could be charged IHT on a tapered scale if you give away more than your IHT threshold of £325,000 in the seven years before your death. Your IHT threshold will also be reduced by the value of the gifts.

Business Property Relief or Agricultural Property Relief

Certain assets receive relief from IHT, these include Business Property, Agricultural Property and Heritage Assets.

These reliefs can reduce or eliminate the value of an asset being included within an estate, but they often rely on certain conditions being met.

However, not every interest in a business will qualify for these specialist reliefs so it is worth seeking specialist professional advice when managing your estate.

Trusts

Trusts can play a role in reducing a family’s exposure to IHT so that more can be passed on to future generations, but they say they can also help look after family assets and provide for family members who are too young or vulnerable to deal with financial matters.

A trust is a legal arrangement where you gift cash, property or investments to a separate entity (the trust). One who gifts assets is the Settlor, the trustees then oversee the management of the assets for the benefit of a third party or parties.

One of the main benefits of a trust is that, should you elect to act as the trustee, you would continue to maintain control over the assets gifted whilst your estate’s exposure to IHT is reduced as, after seven years, the gift is out of the Settlor’s estate completely.

Assets transferred into a trust are no longer considered as belonging to the Settlor, so they are taxed according to the rules governing the trustee.

Many people would prefer to provide for a beneficiary through a trust as opposed to passing assets to them outright. This could involve a source of income for a beneficiary for life, or providing education for children but not allowing them to access funds until they are older.

Write a Will

If you do not have a Will in place, then your assets are handled according to the rules of intestacy.

This could result in taxes that would otherwise be avoidable.

When a married parent dies without a Will, assets (not including personal chattels) over the statutory legacy of £270,000, will be divided equally between the survivng spouse and any children which could result in a possible tax liability if the assets go above the IHT threshold.

With a Will in place, the majority or all of the assets will pass to the surviving partner and this will allow more time for them to give assets away or reduce the eventual bill when they die as well.

For further advice on this topic, contact us today.

Mander Hadley

Mander Hadley Solicitors is not only a long established firm, but is vibrant and successful, with a forward thinking approach.