A recent survey suggests that nearly a third of over-55s have given no thought to how Inheritance Tax (IHT) could affect them. More than half don’t know what their liability will be.
The Treasury’s IHT take, meanwhile, is on the rise. According to the Office for Budget Responsibility, it has more than doubled over the past decade, from £2.4 billion in 2009/10 to £5.2 billion in 2017/18. In the 12 months to June 2021, receipts totalled nearly £5.7 billion, the largest ever take for a 12-month period.
Back in March, the chancellor used his Budget to put a freeze on the IHT nil-rate band until at least 2026. As house and share prices rise over the next five years, this freeze will see more people exceed the threshold, becoming liable for a charge.
Keep reading to find out how IHT could affect you and your family, and how to lower a potential liability.
IHT is usually payable at 40%
The nil-rate band
You will currently pay tax at 40% on the value of your estate that exceeds the threshold amount. The nil-rate band (NRB) is currently £325,000, meaning that there is no tax to pay on the value of your estate up to this amount.
It is also worth noting that any unused NRB can be transferred to a surviving partner on death. This has the effect of potentially doubling the available NRB to £650,000.
The residence nil-rate band
An additional band, known as the “residence nil-rate band” (RNRB) allows you to pass your home (or a share of it) to your children or grandchildren. The RNRB is currently £175,000 and – as with the NRB – it is currently frozen until 2026.
Be aware that if the value of your estate exceeds £2 million, the RNRB is tapered by £1 for every £2 above the £2 million limit, meaning that the additional allowance effectively ceases to exist if your estate is worth more than £2.35 million.
Charitable giving can reduce the rate of IHT
The rate of IHT payable can reduce from 40% to 36% in some circumstances. You would need to donate at least 10% of your net estate to charity for the reduced rate of IHT to apply.
If you’d like to know about charitable giving and how to avoid death and taxes, you can read Peter Maple’s guest blog.
There are ways to lower your IHT liability
Gifting can lower the value of your estate
One way to reduce your IHT liability is by making gifts from your estate to lower its value. The IHT “7-year rule” means that you have to pay tax on certain gifts if you die within seven years of making the gift, but exemptions apply.
The annual exemption for the 2021/22 tax year stands at £3,000. You can give this much away each tax year, removing the amount from the value of your estate for IHT purposes, even if you die within 7 years.
Any unused allowance can be carried over for one year too.
You can also make regular gifts, such as monthly contributions to a loved one’s pension or payments to a grandchild’s Junior ISA (JISA). You need to prove to HMRC that the gift is from regular income and that it doesn’t detrimentally impact your standard of living.
You can pass on your pension tax-efficiently in some circumstances
While the bulk of your retirement planning will likely revolve around your pension, you may have other assets to help part-fund your retirement. Savings and investment, or regular income from buy-to-let properties, could all help to supplement your pension. They might even mean you don’t need to access pension funds at all.
If you have multiple pensions, setting one aside and leaving it until last – or not taking it at all – could allow you to pass its value on to a chosen beneficiary tax-free in some circumstances.
Unused pension pots remain outside of your estate for IHT purposes. On death before age 75, you can pass 100% of any unused pension pots to your chosen beneficiary.
If you die after age 75, your beneficiary can still receive your unused pension, but the amount is taxable at their marginal rate.
You’ll need to contact your pension provider and request an Expression of Wish form to ensure you have a beneficiary in place, as it can’t be done via your will.
Get in touch
To manage your estate tax-efficiently you first need to be aware of the thresholds and limits that apply. If your estate is close to the NRB, or already exceeds it, there are steps you can take to lower your IHT liability and to manage your wealth tax-efficiently.
Globe IFA have decades of experience dealing with pension and estate planning and can help you to make the most of your money, whether through a living inheritance or by putting a will in place through our partnership with Penrose Wills.
The Financial Conduct Authority does not regulate estate planning, tax planning or will writing.