Inheritance Tax – A Summary

At Ahaccountants, we often say that Inheritance Tax is a “voluntary” tax—because with some planning, you can greatly reduce or even avoid paying it. If you’re in the Nottingham area, we’re here to help you figure out how to minimize the impact of IHT and make sure your estate is passed on the way you want.

What Is Inheritance Tax (IHT)?

Inheritance Tax is charged on a person’s estate when they pass away, and it can also apply to certain gifts made during their lifetime. For the most part, gifts made more than seven years before someone dies are tax-free, which means a little forward thinking can save your family from a hefty tax bill later on.

Let’s dive into the key points:

When Does IHT Apply?

• When someone dies: IHT is generally charged at a rate of 40% on estates over £325,000 (known as the nil rate band), but this can be reduced with proper planning.
• Gifts during your lifetime: Most gifts made during your lifetime are ignored for tax purposes if you live for seven years after making the gift.

Exemptions and Reliefs

• Spousal Exemption: Gifts between spouses or civil partners (who are UK-domiciled) are totally exempt from IHT, whether they’re made during life or upon death.
• The Residence Nil Rate Band (RNRB): If you pass on your home to direct descendants (e.g., children or grandchildren), you can claim an additional £175,000 relief on top of the standard £325,000 allowance. For married couples, this can double to £1 million with proper planning.
• Charitable Giving: If you leave 10% or more of your estate to charity, the tax rate on your remaining estate drops from 40% to 36%.

Key Strategies for Reducing IHT

1. Make gifts during your lifetime: If you gift assets to individuals, they’re free from IHT as long as you live for seven years afterward. Even if you pass away within that timeframe, the IHT is based on the value at the time of the gift, not at the time of your death.
2. Use annual exemptions: You can give away up to £3,000 each year without it being counted towards IHT. If you didn’t use this allowance last year, you can carry it over for one year.
3. Small gifts and wedding gifts: You can give up to £250 per person each year without it counting toward IHT. Wedding gifts are also exempt, up to £5,000 from a parent to a child.
4. Normal gifts from income: If you regularly give away part of your income (without reducing your standard of living), these gifts can also be IHT-free.

Downsizing Your Home?

If you’ve downsized your property since 2015, you can still claim the Residence Nil Rate Band relief, as long as assets of an equivalent value to your old home are passed on to your children or grandchildren.

Business and Agricultural Relief

• Business Property Relief (BPR): If you own a business, you might be able to pass it on free of IHT.
• Agricultural Property Relief (APR): Similar to BPR, this can reduce the value of agricultural property for IHT purposes. However, from April 2024, this relief will only apply to UK assets.

Using Trusts

Trusts can be a useful tool for passing on assets while retaining some control. With careful planning, assets placed into trusts may avoid IHT altogether. However, the rules can be complex, so it’s always a good idea to seek professional advice.

Life Insurance to Cover IHT

One way to cover the cost of IHT is by taking out a life insurance policy, specifically set up to pay the tax. This can provide peace of mind for families, especially if the estate includes hard-to-sell assets like family business shares.

Is Your Will Up to Date?

If you’re married or in a civil partnership, proper planning with your Will can allow your estate to benefit from both your and your spouse’s allowances. For example, together you could potentially pass on up to £1 million without paying IHT, but this requires careful structuring.

How We Can Help

While there are many ways to reduce IHT, every situation is different. At Ahaccountants, we’ll work with you to create a plan that fits your personal circumstances and future goals. Whether you want to start making gifts now or look into other tax-saving options, we’re here to help you and your family make the most of what’s available.

If you’re in Nottingham and would like expert advice on inheritance tax planning, feel free to get in touch!