Inheritance Tax Planning – What Is This…. and Why It Is Important To Consider When Making A Will….

As Dying Matters Awareness Week 2021 draws to a close, our final blog is from Wills & Probate Solicitor Anna Bradley on the importance of inheritance tax planning when writing a will….

Inheritance Tax (IHT)

Inheritance Tax (IHT) is a tax on the estate of someone who has died, including all their property, personal belongings, investments and money – held in their sole name and their share of joint assets.

IHT is also charged on the value of gifts made by someone in the preceding seven years of their life, if their value exceeds the available allowances, including the annual exemption which is £3,000.

In addition certain trust interests may also be taken into account as part of the tax calculation.

Everyone in the 2021-22 tax year has a tax-free IHT allowance of £325,000 – known as the Nil Rate Band (NRB).

The NRB has remained the same since 2010-11, and is fixed until 2026.

The standard IHT rate is 40% of anything in your estate over the £325,000 threshold.

For example, if you leave behind an estate worth £500,000, the IHT bill will be £70,000 (40% on £175,000 – the difference between £500,000 and £325,000).

Married Couples and Civil Partners – Transferable Nil Rate Band (TNRB)

If your estate passes to your spouse or civil partner on the first death, then that gift will pass with the benefit of spouse exemption and so you will not pay IHT and you will not have used your Nil Rate Band, 100% of it will remain intact.

Since 2007, it has been possible for the un-used proportion of the Nil Rate Band to be transferred to the estate of the second spouse to die. The estate on the second death then has a possible IHT free threshold of up to £650,000.

This isn’t automatic and must be claimed by the Executors on the second death. IHT is paid to HMRC by the executors of your Will.

The proportion to transfer may be less than 100%, as a result of there being gifts to beneficiaries (eg children or grandchildren) on the first death, or gifts made in the last seven years of your life.

The Residence Nil Rate Band (RNRB)

The RNRB is on top of the NRB and the TNRB was introduced in 2017. From April 2020 to April 2026 the RNRB is £175,000.

To be eligible you must pass your home or a share of it to your children or grandchildren. This includes step-children, adopted children, foster children but not nieces, nephews or siblings.

There is tapered withdrawal of the RNRB if the overall value of your estate exceeds £2 million.

Provided certain conditions are met, the home allowance gives you an additional allowance to be used to reduce any IHT liability against your home.

Conclusion

Married Couples and Civil Partners on the second death have a potential available IHT allowance of up to £1 million For individuals the potential allowance is up to £500,000

If you wish to discuss your tax planning options, please contact me at a.bradley@timms-law.com or call 01283 214 231.

Anna Bradley
May 2021