As the value of property rises and inflation continues across the UK, you might be wondering if this will impact Inheritance Tax (IHT).
With the nil rate band of £325,000 currently frozen until 2026, any estate left behind after death that holds a value higher than this could be liable for IHT depending on the assets it holds.
Inheritance Tax receipts have seen a record high this year, bringing in £3.5 billion for the first half of the 22/23 tax year from April to September. This is £400 million higher than the same time in 2021.
What is IHT and when do you pay it?
Inheritance Tax is a tax on the estate (the property, money and possessions) of someone who’s died.
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!
Can anything be done to reduce or lessen the blow of IHT?
Giving gifts of up to £3000
Gifts of up to £3000 will be tax-free and come under an annual exemption.
This could include payments to help with someone’s living costs, such as a child under the age of 18, a civil ceremony or wedding present of up to £1,000 per person or simply Christmas or birthday gifts.
Any gifts of £3,000 or more in a single year could be subject to the seven year rule. This would result in these other gifts counting towards the value of your estate, and you could be charged IHT on a tapered scale if you give away more in the seven years before your death.
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.
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.
Write a Will
If you do not have a Will in place, then your assets are handled according to the rules of intestacy.
This could result in taxes that would otherwise be avoidable.
When a married parent dies without a Will, certain assets will be given straight to any children which could result in a possible tax liability if the assets go above the IHT threshold.
With a Will in place, the majority or all of the assets will pass to the surviving partner and this will allow more time for them to give assets away or reduce the eventual bill when they die as well.
For further advice on this topic, contact us today.