Inheritance Tax – What you need to know

By Heather Bright, Partner and ARA specialist

An increasing number of families are being affected by Inheritance Tax (IHT). In fact, IHT receipts were up 11 per cent to £2.9 billion between April and August this year.

What is IHT?

Put simply, IHT is payable at a rate of 40 per cent on estates worth over £325,000 at the date of death.

However, this can be affected by a variety of rules and reliefs which actually make the true amount that can be passed on tax-free far greater.

There are planning opportunities available that can mitigate the tax due on your estate and so it is important to review what options may be available to you at this time.

Not all of the options below may be appropriate for your needs, which is why it is advised that you speak with an experienced professional at the earliest opportunity when preparing a Will or arranging your estate.

Nil-Rate Band

Every person in the UK has an allowance for IHT, known as the Nil-Rate Band. For an individual, this is £325,000, but this can be transferred to a spouse so that a couple can have an estate worth £650,000 and not pay any IHT.

Any amount over this allowance will usually be taxed at 40 per cent unless other reliefs are being used.

Since 2017 families have also been able to make use of the Residence Nil-Rate Band, which is an additional allowance connected to property. This was introduced in response to growing house prices across the UK.

This allowance works alongside the Nil-Rate Band to allow couples to pass on up to £1 million tax-free, as long as a property that you had at some time used as a dwelling, is passed on either to a surviving spouse or directly to your lineal descendants.

To use this allowance your estate must be valued at no more than £2 million. If your estate is more than £2 million, then for every £2 above that amount you would lose £1 of the relief.

Gifting

There’s usually no IHT to pay on small gifts you make out of your normal income, such as Christmas or birthday presents, which are commonly referred to as ‘exempted gifts’.

There is also no IHT to pay on gifts between spouses or civil partners and you can transfer as you like during your lifetime, as long as they live in the UK permanently.

However, other gifts count towards the value of your estate, and you could be charged IHT if you give away more than £325,000 in the seven years before your death.

Gifts include anything that has a value or anything transferred at a loss to a family member, such as the sale of a home to a descendant for less than it is worth.

You can give, however, give away £3,000 worth of gifts each tax year without them being added to the value of your estate thanks to the ‘annual exemption’.

If you have any unused annual exemption, you can carry it forward to the next year – but only for one year.

Each tax year, you can also give away additional gifts if they relate to special events such as weddings, birthdays or Christmas, or if they support the living costs of another person, such as an elderly relative or a child under 18.

You can give as many gifts of up to £250 per person as you want during the tax year as long as you have not used another exemption on the same person.

If there’s IHT to pay, it’s charged at 40 per cent on gifts given in the three years before you die.

Gifts made three to seven years before your death are taxed on a sliding scale known as ‘taper relief’. After seven years the gift will be IHT-free.

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.

For example, Business Property Relief (BPR) has been an established part of IHT legislation for more than 40 years.

It ensures that BPR-qualifying shares that have been owned for at least two years, they can be passed on free from IHT after the death of the shareholder.

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

Charity

Anything left to charity in your Will won’t count towards the total taxable value of your estate.

Known as a ‘charitable legacy’, this will also reduce the IHT rate on the rest of your estate from 40 per cent to 36 per cent, as long as you leave at least 10 per cent to charity.

If you are concerned that your estate may be subject to IHT, please speak to us today.