In your will, you decide who you want to inherit your money, property and possessions (your estate). But before your estate is passed on to the people you’ve chosen, a tax bill might need to be paid first.
This is called an inheritance tax, or IHT for short. IHT is tax that must be paid on a deceased person’s estate if the estate goes above the relevant tax thresholds.
There are two tax thresholds when dealing with someone’s estate. The basic Inheritance tax threshold is £325,000, meaning that if the total value of all assets is below this amount then no IHT is payable.
There is also a Residence Nil rate band which is the tax threshold applicable for properties owned by the deceased. The current threshold is £175,000. This means that where a propery is left to a “lineal descendant” then an additional £175,000 in property value is allowed before the estate becomes taxable. A lineal descendant may be children, grandchildren, step or adopted children or their spouses/civil partners.
Confused yet? IHT certainly is not a straightforward calculation. There can also be other exemptions and allowances which may mean that IHT is not payable or is decreased. For example, there will not be an IHT bill if your estate is above the thresholds, but you decided to leave everything above that threshold to your spouse, civil partner, a charity or a community amateur sports club.
IHT is only charged on the part of your estate that is more than the threshold, with the standard IHT rate being 40%.
What is IHT Planning?
If your estate is worth more than £325,000 then you may want to consider IHT planning to ensure that your loved ones receive as much of their inheritance as possible.
To reduce inheritance tax, many Best Foundation members can help you by planning your estate and finances.
Another option is lifetime gifting. Essentially, this means giving away parts of your estate (whether property, possessions or money) whilst you’re still alive. If you make a gift more than seven years before you die, it may not be considered part of your estate, and IHT may not have to be paid on it.
However, there are some completely tax-free exceptions, no matter when you give them away. These exceptions include:
- wedding gifts (up to £5000 from a parent, £2500 from a grandparent and £1000 from someone else)
- gifts to charities and political parties
- gifts of £250 per tax year to individuals (for example, giving £250 as a birthday gift each year to your children and grandchildren)
- up to £3000 of gifting each tax year (providing it is given to someone who doesn’t also receive one of your £250 gifts).
Inheritance tax planning is essentially about reducing the tax bill and ensuring that as much of your estate as possible is inherited by the people you’ve chosen in your will.
If you think IHT planning could benefit you, search for a Best member that can help.
Frequently Asked Questions
- 1. What is the nil rate band?
- 2. What is the residence nil rate band?
- 3. What rules apply to lifetime gifting?
- 4. What assets can I gift?
The nil rate band (NRB) is the threshold for inheritance tax, currently set at £325,000. If your estate is valued below the nil rate band, there won’t be any inheritance tax due.
The residence nil rate band (RNRB) is an inheritance tax relief for residential property that can reduce an IHT bill. It is capped at £175,000.
The RNRB allowance is useful for inheritance tax planning as it allows you to leave a family home to children or grandchildren without paying IHT on up to £175,000.
The rules around RNRB can get complicated, so it is recommended that you seek the advice of a Best member to help you if you wish to rely on it.
You can use lifetime gifting as an inheritance tax planning tool if you have spare income after paying for your usual expenses. You might need to prove that you have enough income to continue the same standard of living without using something like savings to live off.
Also, gifting needs to be a regular part of your spending. For example, if you use the £250 exemption for birthday gifts each year.
You can give any amount over £3000 and this will be considered as a potentially exempt transfer, meaning that in most circumstances IHT will only have to be paid on that gift if you die within seven years of giving it.
Lifetime gifting is not restricted to money. For inheritance tax planning, a gift is considered to be anything with value; this includes assets like property and possessions (such as cars or jewellery).
In some instances, gifting property of shares could result in a capital gains tax bill, so we recommend consulting a Best member for advice if you wish to gift these things.
It is always best to seek professional advice so find a Best member on our website who specialises in Inheritance Tax planning.
