Inheritance Tax - (IHT)
What is Inheritance Tax?
Inheritance Tax (IHT) is assessed upon an individual’s death. A calculation is made of the total of all of their property, money and other assets (their estate) in order to assess whether any tax is due. Inheritance Tax is charged at 40% of any balance over the individual’s IHT threshold.
What is the Inheritance Tax threshold?
Each individual has their own nil-rate band (currently £325,000). Assets passing to a spouse (or charity) are exempt from Inheritance Tax and so do not “eat into” the nil-rate band.
Any unused balance of the nil-rate band may be claimed by the surviving spouse’s executors on their death. This means that there is, potentially, £650,000 that can pass free of tax on the second death.
The Residence Nil-Rate Band was introduced in April 2017, providing homeowners an increase of their overall Inheritance Tax allowance. This relief applies where an individual leaves their home to their children or grandchildren. The allowance can be transferred to a spouse or civil partner if not fully used upon the first death.
The Residence Nil-Rate Band for 2020/21 is £175,000.
Therefore, if added to the existing £325,000 individual allowance, a couple could leave an estate of up to £1 million without paying inheritance tax.
If you think your estate will be over the limit:
There are many legitimate ways to help reduce your IHT liability as long as adequate planning is made. In some cases it may be possible to prevent your estate from paying any at all.
Some methods are simply to reorganise your finances, draw up an effective Will or make gifts in your lifetime, although there are restrictions. Other methods will require some professional financial advice.
Contact us to help you protect your assets.
If your estate will be below the limit:
You don’t have to do anything which means you can leave your assets to whomever you please without worry.
It’s worth checking the value of your estate every so often. If you come into some property or get a cash windfall, your estate could suddenly be liable for Inheritance Tax when you’re gone.
We can help you assess your inheritance tax liability and give advice on the most suitable methods of reducing any liability you may have.