The inheritance tax threshold has been frozen until 2026, making it clear that inheritance tax planning is still important.
If you intend to leave savings, property or other assets to family or friends after you die, you need to consider the impact of inheritance tax (IHT). With the rate of IHT set at 40% for most estates above the thresholds, it is important to plan ahead, so that you can minimise IHT and ensure as much of your estate as possible reaches your loved ones.
Understanding the tax-free allowance
The Inheritance Tax-free allowance, known as the ‘nil-rate band’, allows your beneficiaries to inherit up to £325,000 of your estate without incurring Inheritance Tax. It is possible for up to another full threshold to be claimed in certain circumstances.
If you are leaving property to a family member, the main residence nil-rate band may also apply. This is an additional Inheritance Tax-free allowance that you can use if, broadly speaking, you pass on a property that you have lived in to your direct descendants, for instance, your child or grandchild outright. Currently, the main residence nil-rate band stands at £175,000 maximum, but again it is possible to claim an additional residence nil-rate band in certain circumstances.
On any amount above the thresholds which apply to your estate, the standard 40% inheritance tax rate may apply.
Inheritance tax threshold frozen until 2026
Whilst the nil-rate band has remained the same since 2010/11, the main residence nil-rate band usually rises each year with inflation. The next increase was due this April, however, it was announced in the 2021 budget that the IHT thresholds would be frozen until 2026. A five-year freeze is significant in IHT planning as it means that, in real terms, it is likely that more of your estate will be pushed above the thresholds as the years go by. It is advisable to review your situation in light of this announcement.
Planning for IHT
Most of us want the wealth we have accumulated over our lifetime to be put to good use by those we leave it to. Sadly, when end-of-life financial plans are not put in place, a large portion of assets can be diverted away from the intended recipients. However, with careful preparation, you can ensure as much as possible of your estate reaches your loved ones. As IHT planning can be complex, it is best to seek professional advice, but here are some of the steps you can take:
Pool your allowance with your spouse or civil partner
Spouses and civil partners usually inherit free of Inheritance Tax from their partner. Additionally, they can make use of the nil-rate allowances their partner was entitled to.
If your spouse or civil partner left some of their estate to you, you could apply your own and perhaps a portion of your partner’s Inheritance Tax-free allowances when you pass on your estate.
Make a gift to loved ones
Gifting money or other assets before you die can reduce how much Inheritance Tax will be due on your estate. However, this must be done carefully as the timing of any gift is crucial, with the Revenue still taking into account any outright gifts made in the seven years before your death.
It is also crucial to seek professional advice depending on your particular circumstances. For example, some kind of gifts – a classic example being giving away your home but still living in it – will never escape your estate for Inheritance Tax purposes. There are ways and means to deal with matters, but you would need specialist help.
Leave money to charity
To encourage charitable donations, assets left to a qualifying charitable body are exempt from IHT. Moreover, if you leave at least 10% of the value of your estate that surpasses the nil-rate bands to charity, you can reduce the IHT rate due on the remainder from 40% to 36%.
And there are more exemptions and reliefs which may apply, depending on your circumstances. Many of these have key boxes which you will need to tick to access the benefit of the exemption or relief so, when planning for the future, it is vital to seek professional advice.
For any help or advice on anything covered here, or for further support with inheritance tax and later life planning, please contact our dedicated Later Life Planning team.