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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.
Considering what will happen after you have passed away is not the happiest subject, but it is necessary to consider how to ensure your loved ones are well looked after.
One key consideration is who will inherit your estate, along with whether they will be required to pay Inheritance Tax (IHT).
Whilst who will inherit your estate will be outlined in your Will, you may not have thought about the impact of IHT on how much they will receive.
Normally, if the estate amounts to over £325,000 IHT will be due. However, there are circumstances in which this Nil Rate Band is increased.
For instance, if you own a property and leave it to a spouse or direct descendent, the Residence Nil Rate Band will be applied, increasing the tax-free allowance for the estate to £500,000.
Another exception to the threshold applies if you are married or in a civil partnership and your estate is valued under the taxable threshold.
In this case, the remaining amount that you haven’t used can be added to your partner’s threshold, which could increase your combined threshold up to as much as £1 million!
Even if your estate is valued above these figures, there are several measures you can take to minimise the level of taxable income.
If Inheritance Tax is due, the standard tax rate is 40 per cent, which is charged on the part of your estate that is above the threshold.
How can you reduce the amount due?
As mentioned, you can plan ahead to reduce the proportion of your estate that will be subject to IHT, and even be charged a lower rate of tax.
For instance, if you leave at least 10 per cent of the value of your estate to a charity in your Will, the IHT rate is lowered to 36 per cent on some assets. This is due to charitable legacies not counting towards the taxable value of the estate.
Another way to reduce the taxable amount of the estate is through gifts. If you choose to give small gifts during your life, these are usually exempt from Inheritance Tax.
Although, if you give away more than £325,00 in the seven years before your death, this could be classed as part of your estate and thus, liable to IHT.
There is also an annual exemption allowing you to transfer £3,000 worth of gifts, which can also be carried over for one year if it has not been used.
Planning for IHT can reassure you that your family is financially secure after you die, but it can be complex. Therefore, it is best to consult an accountant for advice on your options.
Find out more about Grunberg & Co’s private client and probate services here.
More and more people are being drawn into paying Inheritance Tax (IHT), as the price of property soars.
This is because former Chancellor Rishi Sunak froze the nil rate thresholds for paying the tax at £325,000 until 2026, while the value of homes has rocketed, potentially drawing more people into paying the tax.
There are some exceptions, which are listed below, but generally, people are then faced with paying 40 per cent IHT on anything gained over the £325,000 figure.
How much do I have to pay?
IHT is levied at 40 per cent on everything in an individual’s estate at their death above the Nil Rate Band of £325,000.
However, many taxpayers also benefit from the Residence Nil Rate Band, which adds an additional allowance of £175,000 for their main property if it is passed to direct descendants.
If you are married or in a civil partnership these allowances can be passed to a spouse or partner once the other person dies.
According to the Office for National Statistics (ONS), in 2009, the average price of a home in the UK was £227,000. In 2021 that had rocketed to £327,000, £2,000 above the initial Nil-Rate band.
In high-value areas, such as the South East and London, this figure is even higher and it means that more and more taxpayers – and not just the wealthiest members of society – are facing IHT bills on their estates after death.
What is IHT?
Inheritance Tax is a tax on the estate (the property, money and possessions) of someone who’s died.
As mentioned, there is normally no Inheritance Tax to pay if:
- The value of your estate is below the £325,000 threshold
- You leave everything above the £325,000 threshold to your spouse, civil partner, a charity or a community amateur sports club
- If you give away your home to your children (including adopted, foster or stepchildren) or grandchildren your threshold can increase to £500,000
- If you are married or in a civil partnership and your estate is worth less than your threshold, any unused threshold can be added to your partner’s threshold when you die.
This means their threshold can be as much as £1 million!
What are the rates for IHT?
The standard IHT rate is 40 per cent. However, this is only charged on the part of your estate that is above the threshold.
So, if your estate is worth £600,000 and your tax-free threshold is £500,000. The Inheritance Tax charged will be 40 per cent of £100,000 or £40,000.
The estate can pay IHT at a reduced rate of 36 per cent on some assets if you leave 10 per cent or more of the ‘net value’ to charity in your Will.
Are there any ways to save on IHT?
Here are some of the ways that you can cut your IHT bill with careful planning:
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 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.
However, you can 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 is 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.
However, not every interest in a business will qualify for these specialist reliefs 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.
Trusts
Trusts can play a role in reducing a family’s exposure to IHT so that more can be passed on to future generations, but they say they can also help look after family assets and provide for family members who are too young or vulnerable to deal with financial matters.
A trust is a legal arrangement where you gift cash, property or investments to a separate entity (the trust). One who gifts assets is the Settlor, the trustees then oversee the management of the assets for the benefit of a third party or parties.
One of the main benefits of a trust is that, should you elect to act as the trustee, you would continue to maintain control over the assets gifted whilst your estate’s exposure to IHT is reduced as, after seven years, the gift is out of the Settlor’s estate completely.
Assets transferred into a trust are no longer considered as belonging to the Settlor, so they are taxed according to the rules governing the trustee.
Many people would prefer to provide for a beneficiary through a trust as opposed to passing assets to them outright. This could involve a source of income for a beneficiary for life, or providing education for children but not allowing them to access funds until they are older.
A growing number of over 70s could be at risk of large Inheritance Tax bills due to their lack of marital status.
It comes as research has shown that the number of over 70s choosing to live with their partner rather than marry or enter a civil partnership has surged by 288 per cent over the last 20 years.
Over the years cohabitation has increased in popularity, which is now having an impact on couples being hit with large Inheritance Tax bills and being forced to sell their home.
There has reportedly been an increase in the number of unmarried couples over 65 seeking professional advice, whose homes are subject to Inheritance Tax when one partner dies.
If one partner owns the property in their name alone, the surviving partner (if they are unmarried and not in a civil partnership) has no clear right of ownership and therefore cannot take advantage of being exempt from paying Inheritance Tax.
They would then be left to pay a potentially hefty bill, which would need to be paid within six months of the death.
As well as mourning the loss of a loved one, the surviving partner would have to quickly sell the home quickly, which comes with more stress and likely a reduced price for the property.
What action can cohabiting couples take?
To avoid this problem, cohabiting couples could ensure the home is in common ownership when they purchase it to ensure peace of mind for the future.
It is also a good idea to get professional advice for succession planning so surviving loved ones are not left with added stress and insecurity.
Inheritance Tax is something we don’t want to think about, but it is important that you understand your liabilities when the time comes. Couples should talk about their situation, so they understand potential future Inheritance Tax liabilities.
When do you have to pay IHT?
Currently, the threshold to pay Inheritance Tax is £325,000. Therefore, it will not be due if the value of the estate amounts to less than £325,000.
The standard rate for Inheritance Tax is 40 per cent, but this is only applied to the amount above the £325,000 threshold.
Another consideration is that Inheritance Tax is not due when the value of the estate exceeds £325,000 but the amount above the threshold is left to the deceased’s spouse or civil partner, a charity or a community sports club.
Find out more about Grunberg & Co’s private client and probate services here.
Experts are warning that a post-Covid rise in disputed wills is evidence that not enough estates are getting professional advice when it comes to complex probate cases.
According to the latest data, the new number of contested probate cases in England and Wales rose in 2019 and 2020, when there were 192 contested Wills, the highest number ever recorded.
This follows from the figures in 2019 being 50 per cent higher than those in 2018 – demonstrating an upward trend in conflict that is expected to continue in future.
Solicitors, speaking to the publication Today’s Wills and Probate, have suggested that the rise in contentious cases could be due to people who suffered financially in the pandemic having greater motivation to obtain larger inheritances.
However, equally, there is a growing concern within the legal profession that some families may be using unqualified advisers to deal with challenging cases, leading to disputes and the potential loss of thousands of pounds in tax relief on estates.
It is thought that a hike in the price of probate fees earlier this year might have forced some families to reduce their costs by seeking cheaper, less qualified advisers, who are unable to deal with conflicts that may arise during the probate process.
The probate fees rose from either £155 or £215 depending on the type of probate needed, to a flat fixed fee of £273.
It was claimed by the Ministry of Justice that this sudden jump in fees was needed to fund improvement to the outdated probate system to make it more effective.
In most cases, families are advised to not only seek help from a qualified adviser but also a solicitor with sufficient experience to deal with contested Wills and probate, as well as the expertise to help them minimise potential Inheritance Tax bills.
Find out more about Grunberg & Co’s private client and probate services here.
Preparing your estate for your death can sometimes be a challenging process, but it is important that the right plans and a Will are put in place to ensure your wishes are met.
Taking the time to arrange your affairs in advance of your passing not only makes sure wealth is passed to the right beneficiaries but often also ensures it isn’t heavily taxed.
Managing an estate after your death requires your family or an appointed professional to conduct a process known as probate.
What is probate?
Probate is a legal process that is sometimes required to validate a deceased person's will in order for their wishes to be carried out by an executor named in the will. The executor is the person responsible for administering the deceased person's estate, ensuring debts are paid and remaining assets are distributed.
This grants the holder of the grant the power to administer an estate, to make sure all relevant taxes are collected, money owing to creditors is paid, debts owed to the deceased are collected and the remaining assets from the estate are distributed to the relevant beneficiaries.
As specialists in all aspects of taxation, accounts preparation and estate planning, Grunberg & Co. Probate Services are best placed to take care of your probate and estate administration work.
We are one of only a handful of accountancy firms in the UK granted a licence to manage this process.
If you are an existing client of our firm, we will already have an in-depth understanding of your personal and business finances, which means we already hold information that assists in completing the Inheritance Tax Return that is required for making a probate application.
What do I need to consider when creating a Will?
After every significant life event, we advise you to update your Will to avoid any issues with it later in life. This includes after moving house, having children, or entering new relationships. Even if you do not experience a major life event, it is worth reviewing your Will every couple of years to ensure it is up-to-date and reflects your current wishes.
In relation to this, it is also extremely important to create a new will after marriage. Once an individual gets married, their previous Will is then void.
In scenarios where an individual passes away without a Will in place, the laws of intestacy apply.
Therefore, wealth and assets will be distributed according to a rigid and commonly less tax-efficient formula, which could even see former spouses or estranged family members benefit from your estate against your wishes.
It is also important to consider what you leave and to whom. This is vital as it makes a significant difference to Inheritance Tax (IHT) bills – we advise that you always have IHT in mind when drafting a will.
How are IHT bills calculated?
An estate is liable to IHT where the following conditions are met:
- Its value exceeds the applicable nil rate band in the tax year in which the deceased died (that is, from 6 April in one calendar year to 5 April in the following calendar year); and
- The excess, or part of it, is not exempt from IHT. The exemption from IHT applies where the excess, or part of it, passes to:
- the spouse or civil partner of the deceased;
- a charity; or
- Another qualifying body recognised by HMRC as exempt from IHT.
IHT is charged at the following rates:
- Below the nil rate band allowance, the rate of tax is 0 per cent.
- On the balance, the rate of tax is:
- 20 per cent for chargeable lifetime gifts;
- 40 per cent on estates on death or 36 per cent where 10 per cent or more of the net estate is given to charity.
An estate or that part of it that is within the nil rate band (currently £325,000 per person) is not charged IHT. However, the nil rate band or part of it may be not available to the estate if the deceased used it up during their lifetime, for example by making:
- Gifts or transfers of value to trusts and companies which are chargeable to IHT.
- Potentially exempt transfer (PET) which have not become exempt transfers because the deceased has not survived seven years after making the transfers.
Any part of an estate that passes to a spouse or civil partner is exempt from IHT provided that both parties were domiciled or deemed domiciled in the UK or neither were domiciled nor deemed domiciled in the UK.
In addition to a deceased’s own nil rate band, where the deceased died on or after 9 October 2007, having survived their spouse or civil partner, the estate may take advantage of the unused percentage of the previously deceased spouse’s or civil partner’s nil rate band. This combined allowance will total £650,000 across both estates.
Individuals who die on or after 6 April 2017 can also benefit from an additional main residence nil rate band (residence nil rate band (RNRB)) if they leave their main residence to their direct descendants. The current RNRB is £175,000 and can be transferred to a surviving spouse or civil partner, meaning that a couple can pass on up to £1 million tax-free.
The RNRB also applies to estates where the deceased downsized by moving to less valuable property or ceased to own property altogether, and where their direct descendants inherit other assets equivalent to the value of the residence at the date of sale.
In some cases, if IHT is payable on the estate, or it is just below the IHT threshold, it is advisable to use a chartered surveyor to value land and buildings and a suitably qualified valuation professional to value unquoted shares.
We also highly recommend using a professional accountant for all your probate matters as they understand complex financial tax matters like these.
How can we help you?
- Estate administration – Assisting the executors or administrators to obtain the “grant” to deal with the deceased’s estate.
- Identifying the assets and liabilities of the Estate – Including bank accounts, pensions, properties, shareholdings, taxes, credit cards, insurance, utilities, etc.
- Valuing the assets of the Estate – Valuing assets in accordance with the Inheritance Tax (IHT) Act 1984, and claiming all reliefs (spouse exemption, charitable gifts, etc.) and transferable nil rate band if applicable.
- Completing the Statement of Truth and IHT forms – This will include either IHT400 or IHT205 depending upon whether the estate is excepted.
- Obtaining a grant of probate – Correspondence with HM Revenue & Customs (HMRC) and Probate Office.
- Estate accounts preparation – Drawing up financial statements showing incoming and outgoing of the Estate and ensuring that assets are distributed in accordance with the Will (or as deemed by law where there isn’t a Will).
- Income tax returns – A Self-Assessment tax return may be required if the deceased had income from sources such as self-employment, interest, rental, overseas income or had capital gains or higher rate tax liability.
- Administration period returns- During the administration period, if income and capital gains arise, these have to be reported to HMRC and tax paid. The exception is if the assets are assigned to the beneficiaries then they will have to report the income and capital gains on their tax returns.
At Grunberg & Co. we can help you put plans in place to minimise IHT including a full Will review, advice on setting up a trust, identifying assets that qualify for business or agricultural property relief and much more.
For help or advice on related matters, please contact us today.