Not the most exciting of subjects for us to talk about, but probably one of the subjects that we get asked about the most. It makes for really exciting dinner party conversations.
It is important to review your Will and the value of your assets regularly (ideally no less frequently than every 5 years) or whenever there is a significant change in your circumstances, and when doing so, it’s a good idea to have a basic understanding of Inheritance Tax.
Inheritance Tax Summary:
Inheritance Tax (IHT) is a charge on the assets you own upon your death, including jointly owned assets. Gifts you make in the seven years before your death can also be brought back into your estate in certain circumstances.
IHT also applies where you give assets away if you retain the benefit of that asset.
Nil Rate Bands:
When you die, the charge for IHT is 0% on any assets within the Nil Rate Band (NRB) and 40% on your assets above this band. Currently, the NRB is £325,000.00 and this has been set until 6th April 2030. Therefore, your assets within this band eg under £325,000.00 can be passed on tax free.
If you are married and you leave everything to each other in the first instance, then this NRB rolls over onto your surviving partner. Therefore, taking a married couple with children – if the parents leave to each other first, and the last of them to die leaves it to the children, then they have a combined IHT NRB of £650,000.00.
If the first person to die has left gifts to people other than their spouse in their Will, then this amount is deducted off the transferable NRB. EG, gifts to children of £32,500 would use up 10% of the NRB of the first to die, and the second to die would therefore have their 100% allowance plus 90% of their late spouse’s allowance.
With me so far? Let’s keep going…
Residential Nil Rate Bands:
We were then given a Brucey Bonus back in 2017, when the Residential Nil Rate Band (RNRB) was introduced. If you are leaving your home to direct descendants eg children or grandchildren (including step-children and adopted children) then you get an additional RNRB which is currently £175,000.00 – each. Again, this rolls over, and therefore a married couple who leave everything to each other and the last one leaves to their children – have an inheritance tax allowance of £650,000.00 plus the value of their house up to £350,000.00. Let’s assume your house is worth £350,000.00 – that gives you a combined inheritance tax limit of £1,000,000.00.
It is worth mentioning that this relief is tapered if the total of your combined estate is over £2 million. In a nutshell, estates worth over £2.35 million cannot benefit from the RNRB.
Downsizing relief:
Don’t panic if you want to downsize but you don’t want to lose the £350,000.00 RNRB – if you sell your residence to downsize, your beneficiaries can claim the value of the sold property up to the full £350,000.00.
The residence must have been sold since 2015 (and there’s a difference between houses sold between 2015 and 2017) – but this is a little too complex to explain in an update and definitely something you should talk to us about if it’s something that is relevant to you.
Charitable gifts:
Gifts to charity are exempt from IHT, and therefore, these can be useful when it comes to estate planning and reducing IHT payable in some circumstances.
The 7 year rule?
Gifts that are “true gifts” can be excluded from your estate, so long as you survive for 7 years after making the gift. If you die within the 7 years following the gift, then the amount of tax payable upon this gift (assuming that you would have been over the NRB/RNRB had you not made the gift) reduces after three years post gift on a sliding scale.
However, gifts where you retain a benefit are likely to fail for IHT purposes, and these assets would be clawed back into your estate and included for IHT calculation purposes. A common example of this is the gift of your home to children whilst you continue living there. Where you reserve the benefit of living there and don’t pay rent to your children, then the value of your house would be included for IHT purposes. (That’s not to say that there aren’t other benefits of doing such a transfer to your children, eg reducing the chance of needing probate, and your home not being used for some means tested calculations.)
Summary:
I hope that the above has given you an explanation of the IHT that would apply to your estate and gives you some peace of mind about the current IHT position. If you are in any doubt at all, then I would always advise you to take some specific legal advice that’s relevant to your personal circumstances.
Disclaimer:
The information in this update is accurate at the date of publication and applies to people domiciled in the UK, but it is not intended to replace or provide Legal Advice – you should always speak to us or another professional if you have any specific advice that you require.
