UNTANGLING UK INHERITANCE TAX

Know

If you thought inheritance tax (IHT) was just something for the extremely wealthy to worry about, think again.

Rising property prices have meant more estates than ever are likely to face an IHT bill. In fact, between 2017 and 2021, families paid £27.2 billion in IHT. This is estimated to climb 36% to £37 billion for the period from 2022 to 2027. Last year alone raised £7.1 billion for HM Revenue and Customs (HMRC).

If your estate has an IHT liability, your beneficiaries will have to pay the tax bill before they can receive the assets you leave them. A legacy reduced by 40% may not be the kind of legacy most people think of leaving behind.

The good news is that there are plenty of things you can do during your lifetime to take care of a potential IHT problem.

WHAT IS IHT? It is a tax payable to HMRC at a rate of 40% on the net estate of the deceased above the nil-rate band (NRB) of £325,000 per individual, or £650,000 per married couple or civil partnership upon death.

Residence Nil Rate Band (RNRB) is an additional allowance that lets you pass up to £175,000 (£350,000 for couples) of a property’s value to direct descendants without having to pay IHT, as long as it is your primary residence. However, the RNRB tapers off by £1 for every £2 over £2,000,000 that your estate is worth, and it’s capped at £2,350,0000 in the 2022/ 23 tax year. That means those with estates larger than that can’t benefit from the RNRB.

WHO PAYS IHT AND WHEN? IHT is paid by the executors of your Will. IHT is paid before the estate assets can be passed to the beneficiaries and must be paid within six months of death or penalties start to apply.

IHT EXEMPTIONS AND ALLOWANCES. Other than the main NRB and RNRB allowances, there are other exemptions and allowances that can be used to minimise IHT:

• Annual gift allowance (£3,000 per tax year)

• Small gifts (up to £250)

• Wedding gifts (up to £5,000 to a child, up to £2,500 to a grandchild or great-grandchild and up to £1,000 to another relative or friend)

• Gifts to charities

• Gifts out of surplus income*

• Gifts to help with living costs (i.e. to an exspouse, elderly dependent or child under 18 or in full-time education)*

*Note that for some of the above gifts to fall off the taxable estate, the donor has to live for at least seven years from the date of gifting.

OTHER WAYS TO REDUCE IHT. Pensions that meet the criteria of being a Qualifying Non-UK Pension Scheme are exempt from IHT following a member’s death. Besides providing its members with retirement income, such pensions are also tax efficient (no IHT, no Capital Gains Tax, reduced tax on rental income), thanks to initiatives granted by HMRC.

Contract-based retirement plans are just one way to reduce IHT, it is also possible to put your property in a trust account.