Taxes have been in the news a lot lately.
However, unlike Income Tax, Inheritance Tax (IHT) and the associated limits are not often adjusted. This is not necessarily a good thing.
Inheritance Tax is a charge on the value of the estate of a person who has passed away. The amount of tax paid (if any) depends on a number of things, but the starting point is that the amount that can be left free of inheritance tax is £325,000 per person. Anything above the limit of £325,000 is taxed (generally) at the rate of 40%.
This £325,000 limit (the Nil Rate Band) has not been raised since 2006 and at present the Nil Rate Band is fixed until at least 5th April 2026. Historically the Nil Rate Band has been reviewed and adjusted nearly every year, but at present this does not seem to be on the agenda.
With the common economic situation – in particular house prices, it is not surprising that more and more people have estates above the IHT threshold, perhaps without realising it.
What can be done?
• Make a Will
• Review your existing Will
• Consider taking advice
Make a Will
Having a Will that is structured in the right way and tailored to your individual and family circumstances can mitigate IHT.
There are additional allowances, exemptions and reliefs which may be available depending on your circumstances, your assets and how your Will is structured. Here are a few examples, but this list is not exhaustive:
• Transferrable Nil Rate Band – this allows the unused amount of your late spouse’s Nil Rate Band to be transferred to your estate upon your death. If the spouse’s nil rate band was unused, then this potentially increases the amount that can be left free of IHT on the second death to £650,000 (£325,000 NRB plus £325,000 transferrable NRB).
• Residence Nil Rate Band – this is a fairly new allowance which in simple terms applies when you have a house which you are living directly to your descendants. It may be possible to claim this additional allowance of up to £175,000 plus a transferred allowance of £175,000 your late spouse in certain circumstances.
• Spouse Exemption
• Charity Exemption
• Business Property Relief
• Agricultural Property Relief
Review your Existing Will
Whilst the NRB is has not been adjusted recently, the rules and allowances have changed.
It is therefore extremely important to review your Will and make sure that it is still working for you in the right way.
Trusts have been used in the past to make a Will IHT effective, but changes over time may mean that those clauses may now potentially hinder rather than help the situation.
One example would be the use of nil rate band discretionary trusts, which were more common prior to the introduction of the transferrable nil rate band in 2007.
These types of trusts are now not always necessary, as the ability to transfer the nil rate band achieves the same IHT result for many, but in a much simpler way. In addition, the presence of a Nil Rate Band Discretionary Trust in a Will may now prevent the additional Residence Nil Rate Band from being available.
Note however, that if your Will does contain a Nil Rate Band Discretionary Trust there may be things that can be done to preserve the availability of the Residence Nil Rate band after death, depending on the way that the Will is drafted and the circumstances of the beneficiaries. Also, IHT is just one of a number of many factors to consider when reviewing your Will and there may indeed be good reasons for retaining the trust.
This is why it is so important to get advice.
Take Advice
In addition to creating/reviewing your Will, you may also wish to take advice on some potential lifetime IHT planning.
There are many many things to consider and some options are more complex than others, but here are a few simple examples:
• Looking at the way that your Pension/death benefits are paid
• Making use of the annual exemption of £3000 to give money away free of IHT
• Making small gifts of up to £250 per person
• Making use of spouse/charity exemptions to make lifetime gifts free of inheritance tax
• Considering making Potentially Exempt Transfers – these are gifts of more than £3000 which will be considered outside of your estate for IHT purposes if you survive for seven years after making the gift
• Using Deeds of Variation to divert assets that are not needed when inherited from a loved one
Mitigating Inheritance Tax is not the only factor to bear in mind when considering your Will and affairs. Often there is a balancing act between the desire to save tax and the desire to provide for beneficiaries. A good advisor will talk to you about your circumstances and wishes and help you to come up with something that you are happy with.
Everyone is different.