IHT is payable upon the death of an individual if the value of their estate exceeds £325,000. For married couples and civil partners, unused portions of this nil-rate band can be transferred to the surviving spouse, effectively doubling the threshold to £650,000.
In response to the continuing rise in house prices, the government introduced an additional nil-rate band when a residence is passed on death to a direct descendant. This nil-rate band will apply if you want to pass your main residence to a direct descendant like a child or grandchild (including step, adopted or foster children).
The nil-rate band is £175,000. When added to the existing threshold of £325,000 this could potentially give rise to an overall allowance of £500,000 for those who are single or divorced, or £1m for those who are married or in civil partnerships. However, it’s important to be aware that larger estates will find that residence relief is tapered; it will reduce by £1 for every £2 of value for estates valued over £2m.
You pay IHT at a rate of 40% on any part of your estate that exceeds the threshold.
Lifetime gifting allows you to give gifts and reduce the value of your estate during your lifetime, therefore reducing your IHT liability.
Each financial year you can make gifts of up to £3,000 (in total, not per recipient) and if you don’t use this in one tax year, you can carry over any leftover allowance to the next year. If you do this, you must use up all your allowance in that tax year, you can’t accumulate several years’ worth of allowance and use it up in a single gift.
You can also make IHT-exempt wedding gifts up to £5,000 for a child, £2,500 for a grandchild and £1,000 for everyone else, as well as individual gifts worth up to £250. These gifts don’t count towards the regular £3,000 allowance.
To reduce the amount of IHT payable, many families consider giving their assets away during their lifetime. These are called ‘potentially exempt transfers’. The catch is that for these gifts not to be counted as part of your estate on your death, you must outlive the gift by 7 years. If you die within 7 years and the gifts are worth more than the nil-rate band, taper relief applies so that if you die say within 6 years, the tax will be less than if you were to die a year after making the gift.
Another simple way of passing money to the next generation which allows for gifts to be made from surplus income. Conditions apply, and advice would be needed to ensure that the gifts are made in the right way.
Trusts are a useful financial planning tool that you can use to set aside money and assets on somebody’s behalf (the beneficiary). Because a trust is a legal entity that takes ownership of the assets it holds, they are often no longer treated as part of your estate for IHT purposes.
However, it is unwise to assume that any assets you place in trust are automatically IHT-exempt. Different trusts have their own IHT rules and are subject to different Income Tax and Capital Gains Tax (CGT) regimes, so it’s important to discuss the type of trust you intend to set up with your financial adviser before going ahead.
The simplest kind of trust, used to ringfence money and assets for a child under the age of 18. They will be entitled to the trust’s assets upon reaching adulthood
The trustees have ultimate discretion over how the contents of the trust will be distributed to beneficiaries. They will also have the power to make investment decisions on the trust’s behalf
A trust set up in somebody’s Will to hold assets on behalf of a beneficiary or beneficiaries
The beneficiary of the trust has immediate access to the trust’s income, but cannot access any of the savings, property or investments that generate the income
Holds the compensation awarded to an individual who has made a successful personal injury claim. It allows you to keep your compensation money separate from your other finances whilst retaining your eligibility for means-tested state benefits.
It’s never too early to start your estate planning journey. The expert advisers at RetireInvest can help you organise your assets and make use of lifetime gifting rules, trusts and other legitimate methods to alleviate your IHT burden and ensure that as much of your hard-earned wealth as possible is passed down to future generations.
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The guidance and/or information contained within the website is subject to the UK regulatory regime and is therefore primarily targeted at customers in the UK.
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Estate Planning, Trusts, and Tax Planning advice is not regulated by the Financial Conduct Authority.
The value of pensions and the income they produce can fall as well as rise. You may get back less than you invested.
The value of investments and the income they produce can fall as well as rise. You may get back less than you invested.
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Neither Retire Invest Nor Quilter Financial Planning are responsible for the accuracy of the information contained within the linked site.
Neither Retire Invest Nor Quilter Financial Planning are responsible for the accuracy of the information contained within the linked site.
Neither Retire Invest Nor Quilter Financial Planning are responsible for the accuracy of the information contained within the linked site.
Neither Retire Invest Nor Quilter Financial Planning are responsible for the accuracy of the information contained within the linked site.
Neither Retire Invest Nor Quilter Financial Planning are responsible for the accuracy of the information contained within the linked site.
Neither Retire Invest Nor Quilter Financial Planning are responsible for the accuracy of the information contained within the linked site.
