Key Considerations Surrounding Inheritance Tax



Inheritance Tax (IHT) is levied on the value of the entire estate (which includes property, shares, money, assets, and possessions) of someone who’s died.

Who Pays Inheritance Tax?

It’s important to note that not everyone will have to pay inheritance tax. For the 2020/21 tax year, the threshold for paying IHT is £325,000 per person, so if your estate is worth less than this, your beneficiaries pay no tax.

In addition:

  • If you gift a property that you’ve lived in as your main residence to a direct descendent (e.g. a child or grandchild) and it is worth less than £2,000,000, you can apply for an additional Residence Nil Rate Band (RNRB) allowance of £175,000, raising the IHT threshold to £500,000.
  • No IHT is due on estates valued over the IHT threshold (whether £325k or £500k) if everything above this threshold is left to your husband/wife/civil partneror to other exempt organisations such as a charity.
  • If your spouse/civil partner has pre-deceased you, your estate can claim their unused allowances as defined above, as well.

Above the threshold, and exemptions notwithstanding, the IHT rate is 40%, or 36% if at least 10% of the estate is left to charity. The bill must be paid within six months of the person’s death, although you may be able to negotiate payment in instalments on tax due on the deceased’s home.

How Can I Reduce The IHT Bill?

For larger estates the IHT bill can be substantial, so let’s look at some of the most common ways you can reduce the tax burden on your beneficiaries before you die:

1) Make A Will

Most people have clear wishes about what they want to do with their assets after their death. A properly drafted Will with clear and unambiguous instructions about how you wish to dispose of your assets can help reduce the amount of IHT payable on the value of the property and money you leave behind. If you leave everything to your spouse/civil partner there is no tax to pay at all.

2) Spend Some Money During Retirement

You’ve worked hard for your retirement, so don’t be hesitant to spend money and enjoy yourself! Some people are reluctant to do so in the belief that they are spending their children’s inheritance. However, spending money will reduce your death duties, which is something to consider if you are someone who has saved all of your working life and has a large estate to leave to your descendants.

3) Make Outright Gifts

Feel free to give money, assets, possessions, and property away as gifts, as this is a straightforward way of reducing the value of your estate after death. However, watch out for the timings, as gifts must be made at least seven years before death to escape IHT rules. This being said, some gifts are automatically exempt regardless of when they are made as you have an annual exemption of £3,000 a year, £5,000 as a wedding present to child and up to £250 to anyone else. You can also give away any excess income you have year on year. For all gifts, record-keeping is essential so your executors know what to claim.

4) Make Gifts Into Trust

This option is ideal for people who want to retain some control over their assets or even want some benefit from the asset to be allocated away from the person that’s ultimately going to inherit. The type of trust will depend on the objective, the value of the asset and the costs and obligations need to be clearly understood. Get in touch to find out more.

5) Business Relief

Shares owned in companies benefit from IHT business relief of up to 100%, so long as you own the shares for at least two years before death. Consider making a business investment if you have large cash or property assets on retirement, as you can draw dividends from these shares as income.

6) Bespoke Structures

Bespoke structures are a complex area of inheritance law that may be appropriate for wealthy families. These arrangements include the possibility of setting up companies and partnerships as vehicles to mitigate tax obligations and liabilities.

Find Out More

Inheritance tax is a complex area of law and it is essential to get plenty of expert advice before making estate planning decisions. Make a free initial appointment with Cornerstone Wills to find out the best way of safeguarding your assets from IHT.

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