Inheritance tax (IHT) used to affect only the wealthy but is increasingly affecting a larger number of families, partly thanks to rising house prices. Before thinking about reducing your inheritance tax, however, your main concern should be ensuring you have enough savings to look after yourself in your lifetime.
When you pass away, assets left to a surviving spouse or civil partner don’t attract any inheritance tax.
If, when you pass away, the value of your estate – that’s your property, money, and possessions – exceeds £325,000 (a.k.a. the “nil-band rate”, NRB), it’ll attract inheritance tax at a 40% rate. That said, the NRB can transfer to your spouse or civil partner when you pass away, giving a couple a total of £650,000 before attracting IHT.
There’s also a “residence nil-rate band” (RNRB) worth being aware of: it’s an allowance of up to £175,000 inheritance tax free relating to your primary residence if it’s passed onto direct descendants like children and grandchildren.
Both your NRB and RNRB can be transferred to your partner, so there is potentially a total of £1 million (£325,000 x 2)+ (£175,000 x 2) available in inheritance tax exemptions.
Financial advisors often provide a free introductory meeting to discuss inheritance tax planning. Here are some areas to consider that could help you get started.
Note that if the gift has increased in value since the original purchase, it may attract capital gains tax, eating into potential IHT savings. And that gifts you continue to benefit from – like gifting your home but continuing to live in it – are a “gift with reservation”, which remain part of your estate for inheritance tax purposes.
A wide range of trusts can be used in inheritance tax planning, all with different advantages depending on your family circumstances:
Setting up trusts requires specialist advice as many are complex, including some having immediate tax implications, so you should consult with your solicitor and independent financial advisor.
Business relief from inheritance tax is available if you own a business, have an interest in a business, shares in an unlisted company – as well as shares in certain AIM-listed companies. Relief is also available on certain land, buildings, and machinery used in the business. Relief can be either at 100% or 50%, depending on various factors.
To qualify, the person must have owned the business or assets for at least two years before passing away – and excludes companies that mainly deal with securities, stocks, shares, land, or buildings, excluding landlords for example.
Agricultural property relief lets you pass on some agricultural property that has been owned for at least two years free of IHT either during your lifetime or as part of your will. The relief is either at 50% or 100%. Agricultural property that qualifies includes land or pasture that is used to grow crops or to rear animals.
You may be able to get business relief on a transfer of agricultural property (e.g. farmland, buildings, or farm equipment) that isn’t eligible for agricultural relief. Taking professional advice here could help as the rules are complex and subject to change.
Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.