Inheritance tax and estate planning
Careful inheritance tax and estate planning can help you pass on your assets securely and efficiently to the people and causes you care about.
The inheritance tax threshold, or ‘nil-rate band’, is currently £325,000. It means that no IHT will be due on the first £325,000 of your estate when you die, regardless of who you leave it to. Married couples and civil partners can transfer any unused element of their IHT nil-rate band to their living partner when they die. This means a couple has a joint nil-rate band of £650,000.
The residence nil-rate band is an additional inheritance tax allowance. To qualify, you must pass on your main residence, or the sale proceeds of your former residence, to your children or grandchildren when you die. Currently, the maximum residence nil-rate band is £175,000. However, it is tapered by £1 for every £2 that your estate exceeds £2m. This means that it won’t be available if your estate’s assets exceed £2.35m.
If you make a gift that isn’t immediately tax free – for example, one that exceeds your £3,000 annual gifting exemption – it is known as a potentially exempt transfer. You must live for at least another seven years for it to be tax free.
Potentially exempt transfers made within the seven years before you die reduce your IHT nil-rate band. The nil-rate band is currently £325,000. So, if you gave your child £200,000 and died within seven years, you would only be able to pass on £125,000 of your estate tax free after your death.
If you gave away more than £325,000 in the seven years before you died, you would eliminate your IHT nil-rate band, and anyone who received a gift above this threshold would have to pay IHT. These gifts are taxed on a sliding scale; this is known as taper relief:
|Years between gift and death
|Rate of tax
|0 to 3 years
|3 to 4 years
|4 to 5 years
|5 to 6 years
|6 to 7 years
|7 or more years
In most cases, pensions sit outside of your estate and so can be passed on to your beneficiaries free from inheritance tax.
Gifts to qualifying charities are exempt from IHT, regardless of the size of the gift. Leaving a gift to a charity in your will could reduce the rate of IHT charged on your estate from 40% to 36%. However, it only applies if you leave at least 10% of your ‘net estate’ to charity.
This does not constitute tax or legal advice. Tax treatment depends on the individual circumstances of each client and may be subject to change in the future.
Information is provided only as an example and is not a recommendation to pursue a particular strategy.