How to prepare and protect your estate.
We are all somewhat used to living with economic doom and gloom at present, from sky-high inflation rates to tax rises being splashed across the news headlines. But recent analysis from the Office of Budget Responsibility shows that you may also get stung harder after you are gone.
They estimate that HMRC inheritance tax takings are set to rise to £37 billion cumulatively over the next five years. That’s compared to £26.7bn for the previous five years to and including the 2021/22 tax year. The rise will be driven by inflation, and the freezing of the thresholds at which inheritance tax becomes payable.
This means that more people, and more of their wealth, get drawn into the scope of inheritance tax.
The good news is there are numerous planning strategies for managing inheritance tax liability. With a little savvy planning, many people are able to take themselves out of its scope completely, or at the very least reduce its impact significantly.
Inheritance tax rules
The standard rate of inheritance tax is 40%, but with careful planning it is possible to significantly reduce your potential IHT exposure thanks to a series of allowances and exemptions.
The most significant of these is your inheritance tax allowance, known as the nil-rate band. This allows the first £325,000 of your estate to be paid free from inheritance tax.
There is an additional nil-rate band for your primary residence of £175,000, if you leave it to direct descendants (including adopted, foster or stepchildren). Your total net estate must be valued at less than £2 million for this to apply. Above this, the additional nil-rate band will be tapered away by £1 for every £2 exceeded.
Furthermore, inheritance tax is not payable on anything left to a spouse or civil partner. Indeed, they can carry over your unused allowances, meaning a married couple (or rather their beneficiaries) enjoy a £650,000 inheritance tax allowance, or £1 million if the primary residence nil-rate bands are also available.
Anything left to charities or community amateur sports clubs is also exempt from inheritance tax.
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