Inheritance Tax is paid on estates at a rate of 40%. However, the following allowances apply before paying IHT:
We all want to see our loved ones inherit as much of our hard-earned wealth as possible. However, we must also acknowledge our own tax obligations. Fortunately, with careful planning, there are many legitimate ways of cutting down how much Inheritance Tax (IHT) you and your heirs might be expected to pay.
Our financial experts have worked with estates of various sizes over the years, helping everyone from the self-employed and small business owners to company directors, to maximise the amount of money they can leave to their successors.
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The nil rate band
The ‘nil rate band’, also known as the IHT threshold, is the amount of an estate on which you do not have to pay inheritance tax. In 2010 the amount was increased to £325k per individual.
In 2007, new rules were introduced for married couples which allow any unused part of the ‘nil rate band’ to be transferred to the surviving spouse or civil partner. For example, if the entire allowance is passed on then no IHT is paid on the first £650k of an estate.
Residence nil rate band
Individuals passing on an estate (which must include a main residence) to direct descendants where the estate is worth more than the nil rate band and less than £2m will be able to claim the Residence Nil Rate band. This was set to increase up to the tax-year 2020/21 as follows:
in 2017 to 2018
in 2018 to 2019
in 2019 to 2020
in 2020 to 2021
The existing nil-rate band will remain at £325,000.
There are a number of ways in which you can reduce your inheritance tax bill. Here are some ideas which you can discuss further with one of our financial advisers:
Make a will. If you don’t have a will, your wealth will be distributed according to statutory intestacy rules, which will most likely result in higher IHT.
Donate to charity. Estates which leave 10% of their wealth to charity pay 36% less
on inheritance taxes.
Make allowable gifts to friends and family members in your lifetime. You are able to give gifts of £250 each year without needing to pay any amount on taxes. Wedding gifts of up to £5,000 to children and £2,500 to grandchildren are also tax free.
Transfer some assets while you are still able to do so. In the case where you are married or in a civil partnership, your assets will pass to your spouse or civil partner without any incurring any IHT costs. However, transfers to other family members or business associates will incur IHT.
Create a trust fund. A trust is a good way to ensure that your loved ones get the financial support they need, because once it is set up it is exempt from IHT. There are different types of trusts available and our advisers can help you to find the right one to meet your requirements.
Take out Life Insurance or Life Assurance, written under Trust, to cover the potential liability. Although usually not subject to income tax or capital gains tax, these types of policies could be subject to inheritance tax at 40%. However, writing your life policy under a Trust is a legal way to avoid paying IHT.
Business property relief (BPR) and death benefits, such as pension plan pay outs, can also help minimise inheritance tax costs.
Make gifts out of “normal” income.
We can help you create a detailed plan to cut down on costs, keeping your unique circumstances and financial needs in mind. From will writing and lasting power of attorney services to trust fund arrangements and gifting management, we are able to provide comprehensive inheritance planning to suit anyone’s budget.
You simply do not need to spend a fortune on tax, no matter how large your estate. Contact our dedicated Inheritance Tax planners today for professional advice and to find out how much you can save.