Are you confused about inheritance tax (IHT)? If so, you are not alone. The Solicitors for the Elderly (SFE), a national organisation of lawyers who specialise in legal services for older and vulnerable people, have produced a helpful video explaining what IHT is and looks at how people can plan ahead to minimise or even eradicate their IHT bill.  By planning ahead, you can reduce your IHT bill for your loved ones and ensure no more tax is paid from your estate after death than is necessary. It is why seeking the advice of specialist lawyers, such as our SFE accredited lawyers at Streeter Marshall LLP, is so important. To view the video, please click here.

So, what exactly is inheritance tax and why is this so important?

What is IHT?

IHT is a tax which may be payable to HMRC on the value of your estate.  Your estate includes cash, property and possessions.  Based on the value of your estate at the time of your death, minus any debts or liabilities, IHT may be payable and beneficiaries could receive less than expected.

When is IHT payable?

In the United Kingdom, IHT is payable on estates valued over a certain threshold, otherwise known as the ‘Nil Rate Band’, which is currently set at £325,000 per person for the 2022/2023 tax year.  IHT will not be payable to HMRC if your estate does not exceed this threshold, as the first £325,000 of your estate can be left tax-free.

In the case of married couples, Nil Rate Bands can be combined. This means that up to the first £650,000 of their combined estate is not subject to IHT, as any unused Nil Rate Band can usually be passed on to the surviving spouse.

In addition to the Nil Rate Band, there is an additional allowance known as the Residence Nil Rate Band, which is currently set at £175,000 per person up until the 2027/2028 tax year. This is applicable when the main residence is passed to a direct descendant, such as children (including adopted, fostered and stepchildren) and grandchildren.  As with the Nil Rate Band, unused allowances are also transferrable to a surviving spouse.

What rate is IHT charged at?

After considering any allowances or exemptions, the remainder of your estate will be charged IHT at a rate of 40%.

What about gifts?

Gifts left to your spouse, civil partner or to charities in your will are free of IHT. However, if you make a lifetime gift within 7 years of your death, this will reduce your tax-free allowance.  For example, if you gifted the sum of £100,000 a year before your death, your Nil Rate Band for the remainder of your estate will be reduced to £225,000.

How do I plan ahead?

At Streeter Marshall LLP, our specialist solicitors can help you reduce, or possibly even eliminate a potential IHT charge and there are different options that we can guide you through to help you ensure the best outcome.  For example, this may include establishing a suitable trust to shelter assets from IHT liability and ensure tax-efficient passing on to beneficiaries.

It is also key to make the most of your will to ensure that your beneficiaries will not have to pay any more IHT than is necessary.  With the ever increasing changes in IHT and other legislation our clients, both young and old, need to plan their finances and review their wills on a regular basis. IHT can be a complex and challenging issue to navigate, especially for those who are not familiar with the tax system. However, with careful planning and the right legal advice, it is possible to minimise its impact on your estate and ensure that your beneficiaries receive the full benefit of your assets. If you have any questions or concerns about IHT or your will and would like to speak to one of our specialist solicitors, please do not hesitate to contact us on 020 8680 2638