Inheritance Tax Planning* is essential for those who own a property or have savings, and care about the future for their loved ones.
The bad news is that without Inheritance Tax Planning your family can face a bill for thousands of pounds when you die. The good news is that with good planning you can legally mitigate or even eliminate this burden for your family.
Inheritance Tax planning options can be perplexing at first, so we’ve covered the basic information you need to know below.
How much will your family pay in inheritance tax?
Fundamentally, this depends on the value of your estate when you die. The simple answer is that your estate assets (property, money and possessions) will be taxed at 40% of its value above the threshold of £325,000. However, there are complications which you need to be fully aware of.
Inheritance Tax and an estate valued under £2m
If you are leaving your home to your ‘direct descendants’ then you can receive an additional allowance of £175,000 (2020/21) if it is inherited by your children or grandchildren. This is known as the Residence Nil Rate Band. This means Inheritance Tax may be payable on the estate value over £500,000 i.e. £325,000 + £175,000.
Inheritance Tax and an estate valued over £2m
A word of caution, the £175,000 RNRB allowance only applies though if your estate is valued at less than £2 million.
If your estate is valued at £2 million or more, you are in danger of losing the additional RNRB allowance at a rate of £1 of the “main residence” allowance for every £2 of assets over £2 million.
Inheritance Tax for Spouse / Civil Partner
If you have left your assets to your spouse or civil partner, then essentially when you die Inheritance Tax is not payable unless you have gifted away more than £325,000 in the previous 7 years. In addition, you may transfer any unused allowance to your spouse / civil partner. So the surviving partner has their own Inheritance tax allowance plus the unused allowance inherited from their deceased spouse / civil partner.
Even if your partner passed away some time ago you may be able to take advantage of these rules as the allowances can be brought forward.
When making your Will discuss this in detail with your Executors, as completing and submitting the correct HMRC documents on your death can be extremely complex.
See our page What Is The Role Of An Executor And A Trustee?
Warning for couples not married
If you are not married / in a civil partnership, then the above Inheritance Tax rules don’t apply in the same way and it can get complicated for the surviving partner. It’s very much dependent on individual circumstances so seek advice when making your Will and considering your Inheritance tax planning.
See our case study How an unmarried couple are protected from excessive Inheritance Tax bills
Other Inheritance Planning Ideas
- IHT Tax free Gift. You may give away £3,000 each tax year. This will not form part of your estate so won’t be subject to Inheritance Tax
- IHT Tax free Marriage / Civil Partnership Gift. As a parent you may give £5,000 (less for a grandparent or others) shortly before the event takes place, and it must go ahead, in order to get the tax free allowance.
- IHT Tax free Charity gift. Leaving part of your estate to charity is exempt from IHT tax.
There are other exemptions which you may wish to consider, depending on your circumstances, and suggest you seek advice which suits your and your family’s situation.
For more information give our friendly team a call today on 0208 568 9602.
* It’s important to consider Inheritance Tax implications when making your Will. If you would like advice on Inheritance Tax planning, we partner with specialists who work with you on your individual circumstances to help you and your family plan for Inheritance Tax. We do not provide this advice at first hand but work closely with our partners.