Careful inheritance tax (IHT) planning is crucial if you plan to leave money, property, or other assets to loved ones after you die. Your heirs may have to pay up to 40% in taxes on what they receive from you because the IHT rate is currently 40%. The best way to make sure that your loved ones get as much of your estate as possible is to have a well-thought-out IHT plan in place.

Tax-free Allowances

The current value of the tax-free allowance, known as the Nil Rate Band, is £325,000. This permits your beneficiaries to inherit up to £325,000 free of inheritance tax. Any amount above this threshold is subject to a 40% tax.

If you leave a home you resided in to qualifying family members, your estate may also be eligible for the Residence Nil Rate Band, which is presently set at £175,000. (eg, children or grandchildren).

IHT Thresholds Frozen Until 2026

Although the Nil Rate Band has been unchanged since 2010/11, the Residence Nil Rate Band typically increases annually in accordance with inflation. In fact, the Residence Nil Band was scheduled to increase in April of this year, but the government declared in the 2021 budget that the IHT thresholds would be fixed until 2026. This freeze is crucial from an IHT planning viewpoint, and in light of this announcement, it is prudent to review your status.

Prudent IHT Planning

If we spend a lifetime amassing fortune, we want it to go to our chosen beneficiaries rather than to taxes. Unfortunate as it may be, this is precisely what occurs if we fail to establish adequate end-of-life financial arrangements. With end-of-life financial planning, however, you can rest assured that as much of your estate as possible will go to people you desire to benefit. IHT planning can be extremely complicated, so it is wise to obtain professional guidance.

There are various effective tax planning strategies, including:

Pooling tax-free allowances with your spouse/civil partner – spouses/civil partners are regarded as exempt beneficiaries and can inherit tax-free. Additionally, you may be able to transfer their unused tax-free allowances to your estate, and vice versa. Doing so might effectively double your estate’s Nil Rate Band and Residence Nil Rate Band (i.e., your tax-free allowances could go from £325,000 to £650,000 and £175,000 to £350,000, giving your estate a total tax-free threshold of up to £1 million);
Gifting money or other assets to loved ones during your lifetime will lessen the value of your estate and, consequently, the amount of inheritance tax (IHT) due. Timing is essential for this option to function in the most advantageous manner. If such donations are provided within seven years of your death, IHT is payable; however, if the gifts are made beyond seven years, the beneficiary is exempt from IHT. The kind and value of the gift are additional crucial considerations;
Donating to charity is tax-deductible, and if you leave at least 10% of your inheritance to a qualified charity, the IHT rate is reduced from 40% to 36%.

Make the most of the money and property you intend to leave to your loved ones when you die. Take the time now to develop a suitable tax strategy. Call us today to speak with one of our experts!