According to figures published by HM Revenue & Customs on 23rd April 2024, Inheritance Tax receipts reached a record high of £7.5 billion in the 2023/24 tax year, a £4m increase on the previous tax year.
- Every year thousands of households in the UK will have to pay tax on their estate, so what’s the best way to avoid inheritance tax?
- Is it possible to retrospectively minimise an estate’s tax liabilities?
Families are becoming increasingly more complex, often shaped by divorces, remarriages and children from previous relationships. This can make estate and trust planning a challenge to navigate around, especially if an individual has strong feelings about those they would like to inherit their assets and those they wouldn’t. Understanding how much inheritance tax might be due can be crucial in these situations.
Effective estate and trust planning could save your family a potential Inheritance Tax bill amounting to hundreds of thousands of pounds. There are various strategies you can consider such as making gifts, setting up trusts and seeking professonal financial advice.
Inheritance Tax planning has become more important than ever following the Government’s decision to freeze the £325,000 Nil Rate Band lifetime exemption until April 2028. Inflation is eating away at its value every year and subjecting more families to Inheritance Tax.
Reducing The Inheritance Tax Bill Beneficiaries Have To Pay
Inheritance Tax is usually payable on death. When a person dies, their assets form their estate. Any part of an estate that is left to a spouse or registered civil partner will be exempt from Inheritance Tax.
The exception is if the spouse or civil partner is domiciled outside the UK. The maximum a person can give them before Inheritance Tax may need to be paid is £325,000. Unmarried partners, no matter how long-standing, have no automatic rights under the Inheritance Tax rules.
However, there are steps people can take to reduce the amount of money their beneficiaries have to pay if Inheritance Tax affects them, such as using inheritance tax examptions.
Where a person’s estate is left to someone other than a spouse or registered civil partner (i.e. to a non exempt beneficiary), Inheritance Tax will be payable on the amount that exceeds the inheritance tax threshold of £325,000 nil-rate band. The threshold is currently frozen at £325,000 until April 2028. This includes the tax free allowance, which can be combined with the residence nil-rate band to increase the overall tax-free amount.
IHT Is Payable At 40% On The Amount Exceeding The Nil Rate Band Threshold
Every individual is entitled to a nil rate band (NRB). That is, every individual is entitled to leave an amount of their estate up to the value of the nil rate threshold to a non-exempt beneficiary and avoid Inheritance Tax altogether.
If a widow or widower of the deceased spouse has not used their entire NRB, the NRB applicable at the time of death can be increased by the percentage of the NRB unused on the death of the deceased spouse, provided the executors make the necessary elections within two years of your death.
To calculate the total amount of Inheritance Tax payable on a person’s death, gifts made during their lifetime that are not exempt transfers must also be taken into account. Where the total amount of non-exempt gifts made within seven years of death, plus the value of the element of the estate left to non-exempt beneficiaries exceeds the nil-rate threshold, Inheritance Tax is payable at 40% on the amount exceeding the threshold.
The value of your estate, including all assets and gifts determines the inheritance tax liability and can be managed through various strategies to minimise the tax burden.
Certain Gifts Made Could Qualify For Taper Relief
The inheritance tax rate reduces to 36% if the estate qualifies for a lower rate as a result of a charity bequest.
In some circumstances, Inheritance Tax can also become payable on the lifetime gifts themselves. Although gifts made between three and seven years before death could qualify for taper relief, which reduces the amount of Inheritance Tax payable (these gifts are considered potentially exempt transfers).
From 6 April 2017, an Inheritance Tax Residence Nil Rate Band was introduced in addition to the standard NRB. It’s worth up to £175,000 for the 2024/25 tax year.
In order to qualify, you must own a property or a share in a property, which you have lived in at some stage and which you leave to your direct descendants (including children, grandchildren or stepchildren). For estates over £2 million, the RNRB is reduced at the rate of £1 for every £2 over £2 million. This reduction is significant when considering the tax free threshold. In addition, it only applies on death and not on gifts or any other lifetime transfers.
Property, Land Or Certain Types Of Shares Where IHT Is Due
It might also apply if the person sold their home or downsized from 8 July 2015 onwards.
If spouses or civil partners don’t use the RNRB on first death – even if this was before 6 April 2017 – there are transferability options on the second death. Executors or legal personal representatives typically have six months from the end of the month of death to pay any Inheritance Tax due. The estate can’t pay out to the beneficiaries until this is done.
The exception is any property, land or certain types of shares where the Inheritance Tax can be paid in instalments. A life insurance policy can also be used to cover or reduce the inheritance tax bill.
Beneficiaries then have up to ten years to pay the tax owing, plus interest.