Category: Tax

Inheritance Tax – Maximising the wealth your loved ones receive

Inheritance Tax – Maximising the wealth your loved ones receive

If you have a large estate and are a high-net-worth individual, Inheritance Tax (IHT) could impact your loved ones hugely, when it comes to your estate being passed down and the amount that they will receive when you pass away.

How does Inheritance Tax work?

Inheritance Tax applies on the estate of someone who has died when at least part of the estate exceeds the tax-free threshold of £325,000 (now frozen until April 2028). This usually consists of property, investments and general savings.

The Inheritance Tax rate is 40 per cent, charged on any of the estate that exceeds £325,000.

If you are a high-net-worth individual and believe your beneficiaries will be charged Inheritance Tax after you have passed away, it is important to understand what they will pay and if there are any ways to plan for this and mitigate the costs in any way.

Understand the value of your estate in advance

Having an accurate idea of your estate value will help you to understand how much Inheritance Tax your beneficiaries are likely to pay.

Remember to account for any debts and funeral expenses when you are working out your estate’s value. It is also beneficial to review this regularly, as the value of your estate is likely to increase over time.

Leaving your property to your spouse/civil partner

If your property is left to your civil partner or spouse, they will not pay any IHT and this is applicable across all assets you leave to your spouse or civil partner.

However, if you leave the property to anyone else in your Will, then they may have to pay IHT, if the estate surpasses the threshold.

Residence nil-rate band

If you own a property, you can apply this additional IHT to the threshold of £325,000. This means that the overall allowance is increased to £500,000 but you must meet certain criteria for this.

You must have lived in the house at some point, after 8 July 2015.

And you must leave the house to a direct descendant, like your children, grandchildren, stepchildren etc.

If the value of your estate surpasses £2 million, then RNRB is tapered.

RNRB decreases by £1 for every £2 that your estate is above £2 million.

If you leave your entire estate to a spouse, then you won’t make use of your nil-rate band and your spouse’s tax-free allowance will double to £650,000.

Similarly with the RNRB, if this is unused, your spouse will have £350,000 added to their tax-free allowance. This is largely only useful if your property is worth £350,000 or more.

We can offer expert guidance on IHT and how to maximise your estate for your loved ones, contact us for advice.


Have you thought about Inheritance Tax?

Have you thought about Inheritance Tax?

Inheritance Tax in 2021-22 was £6.1 billion, a £729 million increase from £5.4 billion the year before.

What is Inheritance Tax?

IHT is a tax on the estate (the property, money, and possessions) of someone who’s died above a set of thresholds, known as the nil-rate band and residence nil-rate band.

The tax is paid by the estate but affects the amount beneficiaries could receive.

How may you be affected by Government changes?

Families paid out £326 million more in Inheritance Tax (IHT) last year after HM Revenue & Customs implemented more rigorous checks on underpayments. Investigators raised 28 per cent more in the 2021-2022 tax year than in the year before. HMRC launched 4,258 investigations in 2021/2022 to recover unpaid tax from bereaved families.

The amount paid in IHT is rising as the £325,000 nil-rate band threshold has not increased since 2009.

Similarly, the residence nil-rate band threshold of £175,000 also hasn’t increased.

One in 25 estates is liable for IHT and it is estimated that this figure will rise.

Who is responsible for paying Inheritance Tax?

If there is a Will, the Executor will be responsible for paying IHT. The Beneficiaries of a Will do not pay IHT on what they inherit, but may have to pay taxes on rental income if they inherited a house.

How can you mitigate Inheritance Tax?

IHT can be reduced through a variety of methods.

If you give gifts of up to £3,000, this will be tax-free and under annual exemptions. For example, this may include payments to help with living costs or birthday gifts.

If you give gifts of £3,000 or more, these may be subject to the seven-year rule meaning these gifts will count towards the value of your estate.

If you die within seven years of gifting, then the gift will count towards your nil-rate band meaning it may be subject to IHT.

You will pay less IHT, the longer you live after the gift is made and you could be charged IHT if you give away more in the seven years before your death.

You may also choose to give away gifts to charity which can help mitigate Inheritance Tax. If you choose to give away gifts to charity, equal to 10 per cent or more of your estate, you only pay IHT at a rate of 36 per cent.

Other ways which may allow you to lower your IHT liability include trusts, Business Property Relief, and Agricultural Property Relief.

If you need advice on Inheritance Tax or probate-related matters, contact us today.