Inheritance Tax | LR Connections tax planning financial services

Inheritance Tax (IHT), has two rates of tax chargeable to a person’s estate when they die – 0% and 40%. The 0% rate of tax, also known as the Nil Rate Band (NRB), is charged on a person’s estate if the value is up to and including £325,000. If the estate is worth more than £325,000 when they die, the 40% rate of tax applies. There are numerous exemptions and allowances which can be used to reduce the value of the estate and therefore the IHT liability.

Any property, money and possessions owned by the deceased are assessed to give the total value of the estate, and any liabilities, exemptions and allowances are then deducted to determine if the estate’s value is less than the NRB. IHT is paid by an ‘executor’ (with a valid will) or ‘administrator’ (no valid will) of an estate.

Anything you leave your spouse or civil partner is free from IHT, but if your spouse or civil partner is a foreign national, then non-domiciled individuals are treated differently based on their individual circumstances. The tax system is constantly evolving and so are the thresholds and limits, so it’s important to make sure that you regularly review your will. Every year HMRC receives ever-increasing amounts of money which, with even basic planning, could have gone to loved ones.

When you meet with an independent financial adviser,  you will discover there is an awful lot that you might not have already considered. For example, IHT is payable within six months of the person dying, whether you’ve received money from the estate at that point or not.  This could be a sizeable amount of money that a family might need to find, and this is where the right protection can prevent a lot of problems in the future. A simple life insurance policy written in trust can ensure that the funds are available as soon as a person dies, alleviating a lot of stress and pressure at a difficult time.

Facts and Figures from HMRC

  • The Nil Rate Band (NRB) has been frozen at £325,000 since April 2009.
  • IHT receipts totalled £5.3bn in 2020-21, and looks set to reach £6bn in 2021-22.
  • Net capital value of estates since 2009-10 has increased by £17bn to £79bn in 2015-16, around 54% of this increase in residential property.
  • The total number of liable estates has increased every year since 2009-10. In 2020-21 there were 30,400 liable estates.
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FAQs

What is inheritance tax?

It is a tax that may be become payable on:

  • Certain gifts made during your lifetime; and
  • On your estate when you die.

Who has to pay inheritance tax?

A person who is domiciled, in the UK is subject to inheritance tax on their worldwide assets. A non-UK domiciled person is only liable to IHT on assets that are situated in the UK, if the value of your estate is in excess of the Nil Rate Band. It may also be payable on gifts made within the previous 7 years of the date of death.

What is the Nil Rate Band?

The standard Nil Rate Band (NRB) for the current tax year is £325,000, although this amount may differ according to your personal circumstances. The tax rate is 0% below the NRB, and 40% if your estate on death is greater than the NRB.

If I leave all of my estate to my spouse or civil partner, do I lose my NRB?

No, your executors/administrators can claim any unused part of your nil rate band. If your spouse is left everything when you die, they could have up to £650,000 (2 x £325,000) to set against their estate. But money left to others, such as children or grandchildren, can erode the amount able to be transferred.

How do I calculate the value of my estate?

If you consider your home to be the UK, then your estate, for tax purposes, will be the value of all worldwide assets. This includes your family home, any buy to let/holiday properties, cars, savings, investments and personal possessions. Your estate on death could also include lifetime gifts you made in the 7 years before your death.

Is there any way to reduce the value of the estate?

Yes, for instance, by citing monies owed, gifts made to a spouse or civil partner, gifts to a registered charity, certain business assets, which have been owned by you for at least 2 years. In addition, there are some exempt gifts that can be used to reduce the value of the estate and include an annual exemption of £3,000. A gift in consideration of a wedding or civil partnership of up to £5,000 per child, £2,500 for a grandchild or great grandchild or £1,000 per other person. Making a gift directly or via a Trust and surviving 7 years after the gift has been made (in certain circumstances, some gifts can reduce the estate’s value after 2 years). Finally, pension savings are not normally included in your estate, however, there are certain circumstances where they could be included.

Will a gift made 5 years ago reduce the value of my estate?

This is known as a failed Potentially Exempt (PET) – if the value of the gift is less than the current NRB, then the gift will form part of the NRB and no inheritance tax will be due, if however, the value of the gift exceeds the NRB, then that part of the value, up to the NRB will be charged at 0% and the excess over the NRB is charged at 40%, on gifts given in the 3 years before death. For gifts made 3 to 7 years before your death, will be taxed on a sliding scale, known as ‘taper relief’ according to the following rates:

Years between gift and death Tax paid

Less than 3

40%

3 to 4 32%
4 to 5 24%
5 to 6 16%
6 to 7 6%
7 or more 0%

If there is a tax liability, when do I pay it?

Once the executor/administrator of the will has calculated any inheritance tax due, it is their responsibility to ensure it is paid to HMRC by the due date (6 months after the date of death).

What is a gift with reservation?

A gift with reservation (GWR) is where the donor of the gift continues to have the use of or the ability to enjoy, any form of benefit from the gift. In these circumstances the gift or asset will be deemed by HMRC to remain as part of the donor’s estate for Inheritance Tax.

If two people die at the same time, who dies first?

If it is not possible to tell who died first then, for IHT purposes, they are deemed to die at the same instant, which avoids double IHT charges.

How can business property relief (BPR) reduce the value of the estate?

The transfer (or ‘gift’) of certain business assets, such as property, can offer relief from (IHT) if the relevant property has been held for 2 years, at a rate of 50% or 100%.

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