The Importance of Inheritance Tax Planning
If you intend to leave savings, property or other assets to family and/or friends when you die, it is vital that you take care in inheritance tax (IHT) planning. The current IHT rate of tax is 40%, which means your heirs will pay up to 40% on their inheritance. However, if you have a considered IHT plan in place you can ensure that your loved ones inherit as much as possible from your estate.
The Tax-free Allowances
There is a tax-free allowance known as the Nil Rate Band, which is currently set at £325,000. This allows your beneficiaries to inherit up to £325,000 without incurring any IHT liability. Any amount exceeding this threshold will be taxed at 40%.
Your estate may also be able to take advantage of the Residence Nil Rate Band, which is currently set at £175,000, if you leave a property you lived in to qualifying family members (eg, children or grandchildren).
IHT Thresholds Frozen Until 2026
Although the Nil Rate Band has remained the same since 2010/11, the Residence Nil Rate Band generally increases each year in line with inflation. In fact, the Residence Nil Band was due to increase this past April, but when the 2021 budget was released the government announced that the IHT thresholds would be frozen until 2026. From an IHT planning perspective, this freeze is significant, and in light of this announcement it is sensible to have your situation reviewed.
Prudent IHT Planning
If we spend our lifetime accumulating our wealth, we want it to be put to good use by our intended beneficiaries, rather than going toward taxes. Unfortunately, that is exactly what happens if we don’t put proper end-of-life financial plans in place. However, with considered end-of-life financial planning, you have the comfort knowing as much of your estate as possible goes to those you intend to benefit. IHT planning can be quite complex so it is advisable to seek professional advice.
There are several ways in which you can efficiently tax plan, including:
Pooling tax-free allowances with your spouse/civil partner – spouses/civil partners are considered to be exempt beneficiaries, meaning they can inherit tax-free. You may also be able to have their unused tax-free allowances transferred to your estate, and vice versa. Doing so could effectively double the Nil Rate Band and Residence Nil Rate Band your estate is entitled to benefit from (ie, your tax-free allowances could be uplifted from £325,000 to £650,000 and £175,000 to £350,000, giving your estate a total tax-free threshold of up to £1 million);
Making gifts to loved ones during your lifetime – gifting money or other assets to loved ones before you pass will reduce the value of your estate and accordingly the amount of IHT payable. Timing is a crucial aspect for this option to work in the most advantageous way. If any such gifts are made within 7 years of your death, IHT becomes payable; however, if the gifts are made beyond 7 years of your death, the recipient will not have to pay any IHT. The type and value of the gift are also important factors;
Leaving money to charity – charitable donations benefit from a tax exemption, and if you leave at least 10% of your estate to a qualifying charitable body the IHT rate of tax will be reduced from 40% to 36%.
Make the most of your hard-earned money and property you intend to pass on to your loved ones after you die. Take the time now to implement a suitable tax plan. Contact Thompson Budd today to speak to one of our specialists!