Navigating estate planning and Inheritance Tax: what you need to know
HM Revenue & Customs (HMRC) recently announced that Inheritance Tax (IHT) receipts were up by £200 million between April to July 2023, making this a record high.
Whilst there were discussions about the six per cent increase being a result of inflation rates, it is never a bad time to start thinking about your estate and tax planning if you anticipate an IHT bill in the future.
Understanding Inheritance Tax
IHT is a form of taxation that is applied to the possessions, property, and money – known as the estate – of somebody who has passed away.
There is usually no tax to pay if the estate is under the nil-rate band threshold of £325,000 or if everything over this allowance is left to the deceased’s spouse or civil partner.
It is worth noting here that the residence nil rate band will also affect the rate of IHT you pay if you qualify for it. Here, your threshold could increase by £175,000 up to £500,000 where your main property is left to a direct descendant. Similar to the standard nil-rate band this can also be passed to your spouse or civil partner, meaning that a couple could leave up to £1 million tax-free.
The standard rate of IHT is usually 40 per cent on the taxable portion of the estate above these thresholds, but this can change if part of the estate is given to charity or other reliefs apply.
Estate planning
There are ways you can organise your estate which will allow you to make the most of tax savings.
Ensuring that your Will is up to date is a simple yet important way of planning your estate. You should generally review this every five to ten years or after a significant change in your life such as a new civil partnership or marriage, a divorce, or having a child.
You could also make use of your lifetime gifting allowances to help with your tax planning. Whilst there are regulations surrounding how much you can give tax-free, this method allows you to make the most of HMRC’s IHT tax benefits.
Examples of lifetime gifting can include money, household and personal goods (such as jewellery, antiques or furniture), property and land, and shares.
A gift can also include the value of money you lose when you sell something to somebody for significantly less than it is worth (such as selling a house to your child for lower than its market value).
Your annual allowance for lifetime gifting is £3,000 (either given to one person or split up amongst multiple people). You can also give small gifts of up to £250 to as many people as you want each year without it being classed as your gifting allowance.
There are separate allowances for gifts for weddings and civil partnerships (£5,000 for your child, £2,250 to a grandchild or great-grandchild, or £1,000 to anybody else), and Birthday and Christmas presents are also exempt from the gift allowance.
It is important to know though that if lifetime gifts are made less than seven years before your death, then they will be added to your estate’s total value.
Some types of trusts also allow you to make use of IHT savings so long as your circumstances qualify. An example of one of these is bare trusts, which are exempt from IHT so long as the transfer was made at least seven years before your death.
Other trusts that may have reduced or be exempt from IHT are interest in possession trusts, trusts for bereaved minors, and trusts for disabled beneficiaries to name a few.
Finally, you could leave a charitable donation in your Will. This value would be taken off your estate’s value before IHT is calculated, meaning that it would lower your tax obligations.
If you would like financial advice about how to organise your estate regarding IHT planning, please do not hesitate to contact us today, and we would be more than happy to help.
