Inheritance Tax (IHT) is calculated on the deceased’s assets as well as certain gifts made during the seven years before death and other types of “disposals” made during the lifetime of the deceased.
Everyone who is domiciled in the UK has a tax-free allowance currently of £325,000 on which no inheritance tax is payable. However, with property values at today’s levels, many estates will be greater than this and inheritance tax may have to be paid at a rate of 40% on everything over the threshold.
Married couples and civil partners living in the UK can inherit from each other without paying IHT. Also lineal descendants can now benefit from Residence Nil Rate Band (RNRB). This will only apply to one residential property per individual. And property that was not a residence of the deceased, such as investment property, will not qualify. In estates that contain more than one residential property, personal representatives will be able to nominate which property should qualify.
It can also apply to residences the deceased no longer owned on death as long as it was owned before July 2015 and the equivalent value of the property is passing to direct descendants. This means after downsizing or selling a family will still be able to benefit from the relief.
But in most other cases IHT will be payable, reducing the amount you can pass onto your relations and friends by up to 40%.
There remains a special relief for spouses which we find is often available and helpful to reduce any tax. It means that the tax free allowance of each spouse (presently £325,000) is available on the second death where it has not been used up on the first death and in many cases this special relief is of much help in general tax estate planning.
Careful planning could mean that you won’t pay more tax than necessary but more importantly, with a sensible plan, assets can be arranged to maximise the benefit to you and to the next generation or any charities you want to benefit.
Understanding the rules about gifts means that you avoid some of the traps in relation to gifts where any benefit is retained and unexpected capital gains tax becomes payable but without the funds to pay it.
Preparing the right records will make it possible and much easier for the executors of your Will to submit income tax returns after your death. We can advise what you need to keep and we can handle the relevant paperwork for you. Of course, taxes must be paid but we can help you plan so as to minimise the amount that needs to be paid away.