As a lawyer of approximately 14 years, this is one of the most frequent questions I get asked. Followed by…how can I minimise my liability to IHT?
This blog will provide clear guidance on the fundamentals of IHT, whether you will be liable for it, and how you can minimise it.
Firstly, what is IHT?
IHT charged on an individual’s death[KL1.1] is based on the value of their net estate immediately before death. The net estate is the total value of the assets owned by that person, less the total value of debts and other liabilities owed by them.
IHT is payable on transfers of value, which can be made:
- when an individual makes certain gifts during their lifetime
- when an individual dies
Secondly, what is the IHT rate?
The IHT rate is 40% and is reduced to 36% should you leave 10% of your net estate to a qualifying UK-registered charity.
Thirdly, do I have any allowances to offset the IHT?
- Everyone has a nil rate band (NRB) allowance of £325,000, which is transferable between spouses and civil partners. This gives a cumulative value of £650,000.
- Should you own a property you also have an additional allowance known as the residence nil rate band (RNRB) allowance. This allowance is £175,000 per individual and is also transferable between spouses and civil partners. This gives a cumulative value of £350,000. There is a limitation with this allowance as it can only be utilised if you are leaving property you own, or a share of a property you own, which is your home to a direct descendant i.e. children, grandchildren etc. This relief is capped to the value of the property in your estate and is also tapered if your net estate exceeds £2 million.
In short, married couples or civil partners can claim up to £1 million worth of allowances on their death.
If you sell, gift or downsize your property during your lifetime, it may be possible to claim downsizing relief to set against your estate. Downsizing relief is complex and professional advice is recommended.
Fourthly, how can I minimise my liability to IHT?
Make exempt gifts (gifts which are completely free from IHT):
- Gifts made between married couples or civil partners
- Gifts to qualifying charities or registered clubs
- Utilise your annual exemption – gifts within the annual exempt limit of £3,000 per tax year. Unused allowance from the preceding year can be carried forward to increase the allowance to £6,000/individual and up to £12,000 per married couple/civil partners
- Gifts of up to £250 to as many individuals as you like each tax year (this cannot be combined with your main £3,000 annual allowance for the same person)
- Gifts out of income – you can make as many gifts out of income as you like, provided these gifts do not deplete your capital or lower your standard of living. Regular gifting out of income, in various amounts and keeping records of this should ensure these gifts are not included as part of your estate for IHT purposes.
Other options to transfer wealth are also available such as chargeable lifetime transfers (CLTs) and potentially exempt transfers (PETs).
Seeing a professional, such as an Accredited Lifetime Lawyer like me, allows your family and financial circumstances to be considered and bespoke IHT advice to be provided. You will leave with tailored advice and an estate planning strategy that suits your specific needs.
Why pay the tax man 40% of your estate (above the allowances) when you can leave more to your loved ones? My little pearl of wisdom is to seek advice at the right time.
Disclaimer
The contents of this blog or any other published by Talbots Law cannot be considered as legal advice. You should take no action without prior consultation with a qualified solicitor or legal professional. The contents of this blog refers to the process in England and Wales.
This blog was written by Shivali Gill, in our Trusts & Estates team.