IHT survives another Budget, here’s how to protect your estate from it
Many were hoping for Inheritance Tax (IHT) to be scrapped in the recent Spring Budget, but the Chancellor has made no moves to do so – or even hinted at the possibility.
The Conservatives are unwilling (or unable) to make changes to the way estates are taxed and the Labour Party have stated outright that they will not be looking to abolish it if they are elected.
Some pundits are even suggesting that Labour will increase the rate at which IHT is applied if they do get into power.
As such, it’s still just as important as ever to protect your estate from IHT as much as possible.
What is IHT, when does it apply and who pays it?
IHT is a tax levied on the estates of deceased individuals before it is passed on to the beneficiaries named in their Will.
The current rate is 40 per cent.
This is applied to estates that are above the £325,000 threshold on the value that exceeds this amount.
(So, if your estate is worth £325,001, there would be a 40 per cent deduction on that £1, rather than on the entirety of the estate).
The responsibility for paying IHT usually falls on the executor of the Will or the administrator of the estate if there’s no Will.
How to reduce your IHT through threshold management
One of the key ways to mitigate against IHT is through the strategic use of thresholds.
The first is the one we mentioned above, the nil-rate band of £325,000 but if you own a home, the residence nil-rate band also applies to your primary residence.
This is a deduction of £175,000 to your estate’s value in the eyes of IHT from the value of your home.
Combined with the £325,000 threshold, this allows you to pass down £500,000 to your beneficiaries completely tax-free.
On top of this, if you pass your entire estate directly to your married spouse, you also give them your thresholds.
So, their nil-rate and residence nil-rate band, combined with yours, mean the total sum of your pre-tax estate would equal £1 million.
(£325,000 + £175,000) + (£325,000 + £175,000) = £1 million
Does donating to charity influence your IHT liability?
If you donate over 10 per cent of your estate’s value to charity through your Will, the IHT rate is reduced to 36 per cent, rather than 40 per cent.
It can also be used to reduce the overall value of your estate to bring you within the IHT thresholds and therefore reduce your liabilities.
Beyond the tax implications, philanthropy is always a powerful way to leave a lasting legacy once you’re gone.
Gifting before you die
To reduce your IHT liabilities and preserve more of your estate within your family, you have the option of gifting some of your assets while you are still alive.
Everyone has an annual gifting allowance of £3,000 per year.
This means you can give away assets or cash up to this amount each year without it being added to the value of your estate for IHT purposes.
(Gifts to your spouse are always IHT free and can be of any amount).
However, this must be done within seven years of your death, so gifting often and early is the recommended strategy here.
The Seven-Year rule applies to gifts given within seven years of your demise and assets given during this period are considered a part of your estate for IHT purposes.
This rule was introduced to prevent last-minute or ‘death bed’ gifting to avoid IHT.
Speaking to an accountant
One of the best ways to mitigate your IHT liabilities is to discuss them with financial professionals who can guide you on estate protection strategies and tax efficiency.
We can take an in-depth look at your finances and work out the best way to reduce your estate’s value (to meet the thresholds) whilst keeping your assets within the family.
Whether it’s through the efficient use of thresholds, the correct use of gifting or through donating to charity, we can help.
Please get in touch if you are worried about your IHT liabilities or you’d like further information.