Article written by Charlotte Mandy, Solicitor, Private Client
The Budget this year comes during a very unique time and has been eagerly anticipated with professionals and individuals waiting to hear what changes might be made by the government in order to recoup some of the billions spent during the COVID-19 pandemic. Although the message from the Chancellor was that he does not expect the public to immediately contribute more in taxes, changes will need to be introduced overtime to claw back some of the spending over the past year.
For inheritance tax this means new legislation that will freeze the existing nil-rate bands on Inheritance Tax (IHT) until 2026. A five-year freeze is significant in IHT planning, and it is advisable to review your situation in light of this announcement.
Depending on the value of your estate, if you propose to leave savings, property or other assets to family or friends after your death, you may need to consider your IHT position. By planning ahead, you can minimise IHT and ensure as much of your estate reaches your loved ones as possible.
Understanding the tax-free allowance
The tax-free allowance, known as the nil-rate band, allows your beneficiaries to inherit up to £325,000 of your estate without incurring tax. On anything above this threshold, the standard 40% IHT rate applies.
If you are leaving property to a family member, the main residence nil-rate band may also apply. This is an additional tax-free allowance that you can use if you pass on a property that you have lived in to your direct descendants – children or grandchildren. The main residence nil-rate band currently stands at £175,000.
Planning for IHT
Most of us want the wealth we have accumulated over our lifetime to be put to good use by those we leave it to. Sadly, when end-of-life financial plans are not put in place, a large portion of assets may be due in tax. However, with careful planning, you can ensure that you maximise the available inheritance tax reliefs and mitigate the amount of inheritance tax payable on your estate.
There are many steps you can take with IHT planning, including taking advantage of the spouse exemption which allows you to combine your allowance with your spouse or civil partner.
If your spouse or civil partner left their entire estate to you, you could apply both your own and your partner’s tax-free allowances when you pass on your estate. Doing so effectively doubles what you can leave to your heirs without incurring any tax. If your partner uses a proportion of their nil-rate band to leave assets to other beneficiaries who are not exempt from IHT, you will only be able to apply the percentage of the allowance they did not use.
Make a gift to loved ones
Gifting money or other assets before you die can reduce how much IHT will be due on your estate. However, this must be done carefully as the timing of any gift is crucial. If it is made seven or more years before your death, the recipient will not have to pay any IHT on it. If you die within seven years of making the gift, IHT may be incurred depending on the type and value of the gift.
Leave money to charity
To encourage charitable donations, assets left to a qualifying charitable body are exempt from IHT. Moreover, if you leave at least 10% of the value of your estate that surpasses the nil-rate bands to charity, you can reduce the IHT rate due on the remainder from 40% to 36%.
As IHT planning can be complex, we would advise you to seek professional advice. It is more important than ever to ensure that not only have you got a Will in place which is drafted with current legislation in mind but that advice is taken in regard to IHT planning within your lifetime
For more information on IHT and how we can help you to plan in the best and most tax efficient way, please email me or contact me on 020 8858 6971.