November 5, 2024
Without proper consideration, IHT can become a great burden on your family. Understanding IHT can help you manage and potentially reduce the tax liability associated with your estate. I’ve outlined some of the key considerations to think about and what the recent Budget announcement could mean:
What Is IHT?
IHT is a tax payable – mostly – on the estate of a deceased person. Sometimes IHT can be payable on lifetime transfers of money or assets.
The IHT payable is mainly due on the net value of a deceased’s person’s estate, which includes property, money, and possessions, less debts and liabilities due.
Nil-Rate Band
The ‘standard’ Nil Rate Band (NRB) is the tax-free amount below which no IHT is paid. The current NRB is £325,000. There were no changes to the NRB in the recent Budget announcement.
Residence Nil-Rate Band
In addition to the standard nil-rate band, there is a Residence Nil-Rate Band (RNRB) available for estates that include a home that are passed to direct descendants (children, stepchildren, adopted children, grandchildren and so on).
The current RNRB is £175,000. However, the RNRB reduces gradually if your estate is worth more than £2,000,000.
In the recent Budget the Chancellor stated that there would be no increases of any of the NRBs at least until 2030 tax year.
Transferable Nil Rate Bands
If you are married or in a civil partnership, and you were to die leaving everything to your spouse/partner, it is likely that the NRB and RNRB can be transferred to the estate of that spouse/partner when they pass away.
Is therefore possible that a couple can pass on £1,000,000 (being 2 x NRBs = £650,000, plus 2 x RNRBS = £350,000) to their descendants (provided they take care when drafting their Wills) without any IHT paid.
Reliefs and Exemptions
When considering your IHT planning, as well as the NRBs and RNRBs, it is very important to consider other ways to minimise the potential liability.
Gifts to spouses/civil partners (both during your lifetime and in your Will) are generally exempt from IHT, so no matter how much you leave your husband/wife/partner, no IHT will be payable on the sum left to them.
Gifts to registered charities and certain other types of organisations such as political parties are exempt from paying IHT.
Reliefs
In the recent Budget the Chancellor stated that as from April 2026 only the first £1,000,000 will receive this 100% relief (and it will be a limit of the reliefs added together) and the rest of the relief will be limited to 50% relief from IHT. There are also strict rules regarding the types of assets to which the reliefs are available.
Furthermore, the relief on AIM (Alternative Investment Market) and unlisted shares (where these do not give you control/significant control over the business) has been reduced by 50%, meaning that these will be taxable at 20%.
The changes to IHT in the recent Budget – particularly the cap on the relief available for Agricultural and Property relief – should make you think about giving assets to loved ones during your lifetime. The law relating to gifts is quite complex, so you may wish to seek advice when considering such gifts, but effective giving can help minimise – or even eliminate – a large IHT liability.
Remember! Keep in mind:
Regularly review your estate planning to maximise the benefits of any of the exemptions and reliefs available to you.
Trusts can be used to manage and distribute assets while potentially reducing IHT liability, but must be set up and managed correctly to avoid unwanted consequences.
Keep your Will up to date – take advice when doing so to ensure that it is drafted in the most tax-efficient manner.
IHT policies are available which will pay a lump sum on death.
Pensions – a further note on the Budget
The importance of keeping track of and planning your estate has also been highlighted as a result of the recent Budget. As well as the changes referred to above in relation to the freezing of the NRBs and the Business Property Relief and Agricultural Property Relief, from April 2027, unused pension funds and lump sum death benefits payable from registered pension schemes will be potentially liable to inheritance tax.
The Government is consulting on the process of how this will be calculated and who is to pay the inheritance tax.
Many people have used topping up their pension scheme as an efficient IHT method of investment, so it is even more important than ever to keep your finances under review with your IHT planning in mind.
If you would like some Inheritance Tax advice or to discuss your estate planning and Will, please contact Nick O’Sullivan on 02920 829 100 or nosullivan@darwingray.com.
