Annual inheritance tax (IHT) receipts are expected to hit a record £7bn this year, according to the Office for Budget Responsibility (OBR), the official forecaster.
More families are getting dragged into the net as decades of house price growth push their estates over the nil-rate band which is frozen until 2028 along with other tax thresholds and allowances.
There are two nil-rate bands (NRB) within IHT. Subject to available reliefs and exemptions, tax is payable (at the rate of 40% currently) to the extent the net value of an individual’s estate exceeds these nil-rate bands.
A £325,000 NRB is available to all in respect of their death estate and can be set against all assets. A further £175,000 Residence nil-rate band (RNRB) is available to those passing on a qualifying residence on death to their direct descendants. This £175K RNRB however reduces by £1 for every £2 that the net value of the estate exceeds £2 million.
Any unused NRB or RNRB following the death of an individual can be transferred to their surviving spouse or civil partner. This means that currently, qualifying estates can continue to pass on up to £500,000, or up to £1m for a couple, without an IHT liability.
If however, your estate is likely to fall within the scope of Inheritance Tax then forward planning is vital to ensuring you minimise your exposure. There are some very useful reliefs and exemptions noted below:
- There is an annual exemption available for IHT purposes where each individual can transfer up to £3,000 per tax year from their estate without incurring any liability to IHT.
- There is the option to make “gifts from income” which can often be an overlooked relief. Essentially, if an individual is making significant income, well in excess of what they need to live on, then they can gift any excess away each tax year without it being a Potentially Exempt Transfer (see below). Documentation is key here to ensuring you remain within rules of the relief, and professional advice should be sought beforehand.
- Any other transfer (including property) by an individual could potentially fall into the IHT regime and this is known as a Potentially Exempt Transfer (PET). In these circumstances some form of Inheritance Tax will be calculated and due if the individual gifting the asset dies within 7 years of making the transfer.
- If you own a qualifying “trading” business on death, this may also qualify for Business Property Relief. If this does apply trading businesses can potentially be passed onto family members free from IHT on death. This is of course assuming all conditions are met to qualify for the relief and this is something you should seek professional advice upon as part of your overall IHT planning.
- The estate can pay Inheritance Tax at a reduced rate of 36%on some assets if you leave 10% or more of the ‘net value’ to charity in your will. (The net value is the estate’s total value minus any debts.)
Finally, it is also important to note that there may also be Capital Gains Tax implications to consider when transferring assets to family members, and therefore you should always seek professional timely advice prior to carrying out any transfer.
Should you wish to discuss any of the above in further detail then please do not hesitate to contact your usual Drummond Laurie contact, or please feel free to get in touch with us on firstname.lastname@example.org.