Inheritance Tax

Inheritance Tax is a tax levied against a person’s estate when they die, after any relevant allowances are taken into consideration.

There is usually no tax to pay if:

• The value of the estate is below the ‘Nil Rate Band’ (NRB)
• Everything above the threshold is left to a spouse or civil partner

If the value of the estate is above the Nil Rate Band, then that part of the estate is taxed at a tax rate of 40%.

However, should at least 10% of the estate be left to charity, this reduces any IHT liability to 36%.

What is the Nil Rate Band?

At the moment the Nil rate Band (NRB) is fixed at £325,000 until April 2028, following the 2022 Autumn statement. this may increase if the deceased survived their widow or civil partner.

Couples can transfer any unused NRB to the survivor, when the first person dies which can effectively increase the NRB to £650,000. The extra transferable element is known as the Transferable Nil Rate Band (TNRB).

What is the Residence Nil Rate Band (RNRB)?

In addition to the standard NRB a Residence Nil Rate Band (RNRB) was also introduced in 2017. This is on top of the other bands.

To be eligible, an individual must pass their home, or the equivalent value of it, to a direct descendent. This can include step-children, adopted children, foster children but not nieces or nephews.

The RNRB is £175,000 and this figure is now fixed until 2028. It is important to note however, that this value can be reduced if the overall value of the estate exceeds £2 million, with it being removed completely should the estate value exceed £2,350,000.

If the value of the property is less than the available RNRB, then the only value of the property can be used to gain this additional relief.

So what might be included in my estate and how is it taxed?

HMRC will value your estate upon death and will typically include the following:

• Your savings (bank accounts, investments etc)
• Possessions (including property)
• Depending on exemptions, the value of any money or property you gave away during the seven years prior to death. A Will is the primary way in which you can potentially reduce your future IHT bill.

For example, if your estate is worth £600,000, with a property of value included at £300,000, the full NRB of £325,000 and RNRB of £175,000 are available. Tax would be charged on the liability above the available tax reliefs £100,000 (£600,000 - £325,000 - £175,000). The tax payable would therefore be £40,000 (40% of £100,000).

How can I reduce or mitigate the liability?

During our lifetimes, it is possible to reduce the impact of IHT. This can be done with simple steps such as:

• Making a Will
• Giving assets to those close to you
• Placing assets in Trust for others (and still receive an income)
• Making personal pension contributions, as these are exempt from your estate on death
• Making specialised investments that qualify for IHT relief
• Taking out life insurance
• Making gifts from disposable income
• Leaving money to charities, or
• Spending your money

The options that are available can be confusing and it is essential that you receive the correct financial advice before making a decision.

 Aside from inheritance, Lovewell Blake can help you with all aspects of personal financial planning.