Britain’s paid out the highest ever amount of inheritance tax (IHT) to HMRC in 2017-18, with the latest figures showing the bill totalled £5.2billion, in 2018/19 that figure increased to an even higher bill of £5.4billion.
Data shows that most of the inheritance tax payments come from estates worth between £500,000 and £1million. In 2016-17, 13,300 estates of this size had to pay inheritance tax – more than any other value range. Around half of all estates of this size ended up with a bill, with the average charge sitting at £90,600. However, the likelihood of having to pay IHT is vastly increased for larger estates, as the tax-free allowances won’t cover much of their value. Of the estates worth more than £2m, 89% had to pay inheritance tax.
The Nil Rate Band (NRB)
Each individual is entitled to pass on an amount of their estate free from inheritance tax. This allowance is known as the NRB and is currently frozen at £325,000, until at least 6th April 2021. In the case of married couples and civil partners, all assets can be left to the surviving spouse or civil partner free of tax and without utilising the NRB. Since 2007 married couples and civil partners can also transfer any unused NRB to the surviving spouse or civil partner.
Therefore, if a husband or wife passes away, leaving their entire estate to the surviving spouse, there will be no inheritance tax to pay on their death and their NRB can also be transferred to the surviving spouse. A widow or widower could thus have a NRB of £650,000, comprised of transferred NRB and their own NRB. This is before taking into account the RNRB.
The Resident Nil Rate Band (RNRB)
For most people, their home is likely to make up the biggest chunk of their estate. To address this, the government introduced an additional allowance of £175,000 called the resident nil-rate band (RNRB) which can be added to the £325,000 nil-rate band (NRB). This means you could pass on up to £500,000 without tax per person after April 2020, or £1 Million as a married couple pooling your allowances.
But there are some caveats to be aware of.
You can only use this RNRB allowance when you leave your home to a direct descendant, meaning either a child or grandchild (adopted children and step-children by marriage can also benefit). If you leave your property to any siblings, nieces, nephews or friends, the allowance won’t apply. There are also restrictions on the value of your estate. If it’s worth more than £2m, the extra allowance tapers off, falling by £1 for each £2 above the threshold. So, in 2019-20, you’ll lose the main residence nil-rate band if your estate is worth more than £2.3m (or £2.7m if you pool your allowance with your spouse).
A Voluntary Tax
How much IHT is paid when you die will be determined on your tax planning, your estate value, your relationship status and who you are leaving your monies to in your Will.
…Inheritance Tax is Voluntary, it’s only paid by those who haven’t planned for it
As IHT laws and allowances have changed in the last 13 years, many people may have wills that are out of date or have been written to include trusts that could prevent the family from taking advantage of the full IHT allowances available. Reviewing your Will regularly is a must.
There are various ways to avoid paying IHT and planning is key. Were you aware that there are no limits or 7 year rule on what monies you can gift in your lifetime out of your disposable income? Or investing in BPR qualifying companies that reduces the 7 year rule on gifting to only 2 years? Or covering any IHT liability with a simple insurance policy?
Then there are the options with the use of generational trust planning and how you pass the monies on to family to prevent giving them an IHT liability (the same money being taxed again and again and again). You work hard to build up your wealth and it is important to think equally hard about protecting it from erosion through the generations because of unnecessary tax payments.
Through our Financial Partners we are happy to offer a free guide to ‘Untangling IHT’ that will explain in detail all options available when planning for IHT.