Reducing the Inheritance Tax payable on your estate

With property prices having risen over the last few years, you don’t have to be hugely wealthy to be affected by Inheritance Tax (IHT). More families are calculating the value of their estates and finding they have a greater liability than they’d thought. However, the good news is that expert planning can legitimately reduce the tax payable, allowing you to pass on more of your assets to your family as you’d intended.

More families are calculating the value of their estates and finding they have a greater liability than they’d thought. However, the good news is that expert planning can legitimately reduce the tax payable, allowing you to pass on more of your assets to your family as you’d intended.

IHT is payable on money, savings or any other assets in your estate and potentially on some gifts you make during your lifetime. The current individual threshold (nil-rate band) is £325,000.

If the estate exceeds this figure and the estate isn’t left to a spouse, civil partner or a charity, (and isn’t eligible for reliefs such as agricultural or business relief) then the excess will be liable to IHT at 40%.

From April 2017, estates have benefited from an additional residential nil-rate band (RNRB) This  is currently £175,000 and applies where the deceased’s residence is left to their direct descendants (children, step-children, adopted and fostered children and their respective spouses and civil partners). Where an estate has a net value of more than £2m, the RNRB is withdrawn at a rate of £1 for every £2 over this threshold.

From 2020, if the nil-rate band and RNRB are both rolled over unused on the first death to the surviving spouse or civil partner, on the second death this would mean there could be a tax-free nil- rate band of £1m available.

Ways to limit your exposure

We can advise you on ways in which you can legitimately reduce the amount of IHT that would be payable on your estate.

For instance, it’s vital to have a valid will in place; spouses and civil partners can transfer assets between each other free of tax, but if you die intestate, then IHT could become payable.

To reduce the tax bill, you can consider giving assets away during your lifetime. These are called ‘potentially exempt transfers’. For these gifts not to be counted as part of your estate on your death, you must outlive them by 7 years. If you die within 7 years and the gifts are worth more than the nil rate band, taper relief applies, meaning the tax will be less the longer you survive.

Gifts that are exempt

Each financial year you can make gifts of up to £3,000 (in total, not per recipient) and you can carry any unused allowance over to the next year, which means you could give away up to £6,000. Gifts of £250 to any number of people are exempt.

Weddings are another opportunity to make tax-free gifts. Each parent of a bride or groom can give up to £5,000; grandparents or other relatives can give up to £2,500 and any well-wisher can give £1,000.

A strategy tailored to your needs

We can also advise you how you can make gifts from your surplus income and how you get relief from IHT if you pass on relevant business assets, and some types of agricultural land. It can be worth considering putting some of your cash, investments or property into a trust, as by doing so, they will no longer form part of your estate for IHT purposes.

One thing is certain, if you feel that your estate is likely to be subject to IHT, you should obtain in-depth professional advice that looks at all aspects of your requirements, lifestyle and goals, and develops a financial strategy that meets your needs. If you could use some practical, no-nonsense advice, then please do get in touch.

INFORMATION IS BASED ON OUR CURRENT UNDERSTANDING OF TAXATION LEGISLATION AND REGULATIONS. ANY LEVELS AND BASES OF, AND RELIEFS FROM TAXATION, ARE SUBJECT TO CHANGE.