Inheritance tax (IHT) used to be seen as a rich person’s tax, not one a normal family would have to pay. This is no longer the case, as nowadays the average IHT bill for a bereaved family amounts to almost £62,000 in England.
In this blog, we will discuss the implications of inheritance tax in further detail, as well as some ways it can be mitigated. Keep reading to learn more.
Inheritance Tax is a tax levied on the estate (including property, money, and possessions) of someone who has passed away. The tax is calculated based on the value of the estate above a certain threshold, known as the ‘nil-rate band’.
The number of estates now being liable to an inheritance tax bill is ever-increasing, mainly because the IHT tax threshold has been frozen at £325,000 since 2009. The government has confirmed this threshold is to be frozen until at least 2028, so the problem is not going away, it’s only likely to get worse.
In the course of the last 14 years there has been no increase in the threshold, whilst the increase in house prices (approximately 86%), investments, and savings over that same 14 year period means that even a modest estate could now be subject to IHT.
I am of course biassed, but with good planning any IHT payable by the estate could be mitigated.
The IHT tax rate applied to the estate value exceeding the exemptions available is 40%, or 36% if you leave 10% or more of the estate to charity.
However, there are two caveats I always make at this point, being:
The above said, my recommendation is you need to know if there is the potential for your estate to have an IHT liability. If there is, then planning to mitigate this must be a good idea. After which we need to keep it under review.
There is a small silver lining in relation to exemptions available to an estate.
For example, if you are married and on the first partner passing, all assets pass to the second partner. Then on the second death the estate will have two lots of the £325,000 available, so a total of £650,000.
Also, in April 2017 the resident nil rate band (RNRB) was introduced. This exemption comes to £175,000 and like the IHT nil rate band of £325,000, has been frozen until 2028. As with the IHT nil rate band, if married, on passing of the second partner two lots of the £175k should be available to the estate.
For the RNRB to be available to an estate, broadly speaking it can be claimed where the family home is inherited by children or other direct descendants.
Applying the above, at best, the estate will have £1,000,000 in exemptions available to it assuming it meets all the conditions.
Inheritance tax is a significant consideration in estate planning that can impact the legacy you leave behind for your loved ones. Understanding its implications and employing strategic methods to mitigate its impact can help preserve your wealth and ensure a smoother transition of assets to the next generation.
If you would like to discuss this further, our team of Exeter chartered accountants are offering a free, one hour consultation to go through your assets and assess firstly, if any IHT will be payable by the estate. If there is, then we can discuss opportunities to mitigate the IHT payable.
Get in touch with us today on 01392 360008 or via email at dan@sidaways.co.uk.
Daniel Routcliffe FCA CTA
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Dan Routcliffe
Email: dan@sidaways.co.uk
Tel: 01392 360008
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