Managing your inheritance tax
Posted on 27th February 2022 at 17:00
Inheritance tax (IHT) is one of the most unpopular form of taxes due to the extremely high 40% tax rate which typically is more than most would pay during their lifetime. Making plans to minimise IHT has never been more important.
HMRC estimates a £700m increase in IHT receipts during the last financial year, with £5 billion going into Treasury coffers. Most of the additional IHT receipts have occurred due to the increase in house prices, which have had a knock-on effect on the value of many estates, especially as the £325,000 personal IHT allowance has stayed the same since 2009. According to Quilter if the allowance had been left increase due to inflation, it would have been worth £428,000 in 2022/23.
Transfer of allowances
Any remaining allowance can be transferred on the first death between spouses or civil partners. This means a married couple where the first spouse or civil partner uses none of their NRB leaves a £650,000 allowance for the second spouse or civil partner.
The Residence Nil Rate Band (RNRB) of £175,000 is also available – and can also be transferred in the same way as above – however this has added complexity to IHT. Those who have no children, the RNRB cannot be used at all, which increases the complexity around advising on this.
However, with the average house price now at £288,000 - just £37,000 shy of the £325,000 threshold – many more people look likely to get drawn into this tax net without some prior planning.
You can mitigate this tax
Due to the fact that IHT can be mitigated during our lifetimes it is considered by some as a ‘voluntary tax’ and one that certain people have been planning to mitigate for years. Although it is considered a tax on the wealthy, even those with relatively modest estates and income can be strongly impacted by this tax.
To reduce this impact one must reduce their exposure to IHT before they pass regardless of their wealth or income. Ways on how to do this are explained below.
Ways to reduce your IHT liability
One way to reduce the effect of IHT involves making gifts or donations during your lifetime to reduce your estate so the value is below these thresholds. Doing this ensures there is no IHT for your beneficiaries to pay.
You can make gifts to spouses or civil partners without any IHT, but you can also gift up to £3,000 a year to other people using your annual exemption. For a couple, this means they can gift up to £6,000 a year with no IHT impact.
You can also gift unlimited amounts above your normal expenditure, providing it does not alter your standard of living. If you want to make larger gifts, then providing you survive them by seven years, it will be considered a potentially exempt transfer and free of IHT.
If you die within this seven-year period, a tapered amount of IHT would be applied.
We can help you mitigate IHT
There are many more ways you can reduce your IHT liabilities. IHT planning is an extremely complex area, simplified with our expert help. So, if you would like to find out more about how you can reduce your liabilities for your beneficiaries, then please do get in contact.
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