Inheritance Tax (IHT) is one of the least popular taxes in the United Kingdom. It’s a 40% tax on an individual’s property, money, and possessions (otherwise known as your estate) on your death and is charged on the value of your estate which is in excess of what is known as your IHT Nil Rate Band (NRB) of £325,000 per individual.
However, the estates of many practice owner professionals, business owners, and executive directors often exceed this threshold – subjecting their accumulated wealth to potentially significant tax liability. However, whilst the prospect of having to give HMRC 40% of your estate is understandably galling, there are ways to mitigate your potential liability to IHT through prudent legacy planning.
Under current government rules, there are certain circumstances that allow you to extend how much you can leave or bequeath to your loved ones without being subject to IHT tax. For example, if you leave the portion of your estate which is above your Nil Rate Band to your spouse or partner (or to a charity or an amateur sports club) then it’s exempt from IHT. And, if you do choose to leave your entire estate to your spouse or partner, they will also inherit your unused Nil Rate Band in addition to their own, meaning they can pass on a greater portion of the estate tax-free on their death – for instance, £650,000.
You may be fortunate enough that your estate may qualify for Residence Nil Rate Band relief (RNRB) currently £175,000, which further reduces your estate’s liability to IHT, subject to the value of the property gifted to direct family members.
In addition to these measures, there are further ways in which you can reduce the impact of IHT. Gifting money to your loved ones whilst you’re alive is one of the most simple and quick things you can do. Each individual has an IHT annual gift allowance of £3,000 each tax year, as well as unlimited gifts of £250 tax-free, and you can gift £1,000 to a couple as a wedding present. These are among a few of the gifting options available. Whilst you can gift above these figures, it’s important to be aware that if you don’t live for 7 years from the date of the gift, then the value of the gift above your available annual allowances may become taxable.
Another way to reduce the amount of your estate that is liable to IHT is to leave a portion of it to charity. Whilst most people are aware that money left to UK registered charities, political parties or local sports clubs is tax-free, many people do not realise that if they leave more than 10% of their net taxable estate (i.e. the amount which exceeds your NRB threshold) to one of these groups then the tax on the rest of their estate falls to 36%.
Beyond these measures, there are other options that can be employed to mitigate IHT i.e. such as gifting during life, However, tax and legacy planning is a complex area, and therefore if this is an area of concern we recommended that you schedule an Exploration Meeting to discuss your current financial situation.
To safeguard your wealth, it is always best to seek professional advice and guidance.
Do you need help reducing inheritance tax? Contact us today.