Do you know how much Inheritance Tax your estate will pay on your death?
With the Budget last week confirming that the Inheritance Tax thresholds and allowances will be frozen for another 5 years, now is the time to look at your estate and see if there are any steps you can take to reduce your likely Inheritance Tax (IHT) liability.
With IHT payable at 40% this can lead to a significant tax bill on your death, meaning that your loved ones may have to sell assets such as your family home in order to settle up with the taxman.
Whilst there is no magic solution, there are ways in which you can structure your assets and provisions you can put in place within your Will to minimise your IHT bill.
Currently each individual has an allowance known as the “Nil Rate Band” (“NRB”). This allows a person to pass on the first £325,000 of their estate free of Inheritance Tax. Assets passing between married couples/civil partners are tax-free meaning the NRB is unused. Such unused allowance can be transferred to the surviving spouse leaving £650,000 to pass tax-free. The value of your estate above this is generally taxed at 40%.
There are other allowances and reliefs available such as the "Residence Nil Rate Band" ("RNRB") which can be claimed if you own a property you have lived in at some stage and are passing it down to your direct lineal descendants i.e. children, grandchildren. There are however certain criteria in place in order for your estate to claim this RNRB. If met, this additional allowance could save your estate a further £140,000 in IHT. It is therefore very important to ensure that your Wills are drafted to allow your estate to claim the RNRB as simple drafting errors could lead to your estate being ineligible, meaning the additional tax would be payable. The RNRB was first introduced on 6th April 2017 so if you have not reviewed your Will since then, you may find that your Will inadvertently prevents your estate from being able to claim this additional allowance.
As well as ensuring your estate can claim all possible available allowances, if you are looking to reduce the size of your estate through lifetime planning, you may wish to consider making lifetime gifts. Each individual can make a gift of £3,000 per year from their estate without any Inheritance Tax consequences. If you have not used up this annual allowance then you can carry it forward one year, but beyond that point you will lose it. This means that if you did not make use of the £3,000 annual gifting allowance in the tax year 2019/2020, you have until 5th April 2021 to use it before it is lost forever.
There are other tax saving options to consider such as gifts out of excess income, leaving more than 10% of your estate to charity, investments which qualify for Business Property Relief and tax efficient trusts set up through your Wills. Taking action now could save you thousands in Inheritance Tax meaning that those funds can instead pass on to your loved ones.
If you would like to book a Will Review simply to ensure that your current Wills do not prevent your estate being eligible to claim any allowances, or perhaps a full Estate Planning Review to see what options are available to you to minimise any tax bill on death, please do get in touch today. We agree a fixed fee with you in advance which for a Will Review is as little as £50 for a single Will and £75 for a couple with mirror Wills (no VAT). You can book online here (via our Facebook page) for evening and weekend appointments or alternatively contact us on 07827 779255 or firstname.lastname@example.org.