Inheritance tax (IHT) is a significant consideration for many families. As estates grow, so too does the need to understand how it works, who is responsible for paying it and how to minimise its impact on your beneficiaries.
We’ll explore the details around IHT rules and provide practical advice for estate planning.
What is inheritance tax and who pays it?
Essentially, this is a levy on the estate of someone who has died and encompasses their property, money and possessions. The standard rate is 40%, which is applied to the portion of the estate that exceeds the current threshold, known as the nil-rate band.
As of the 2024/25 tax year, the nil-rate band is set at £325,000, meaning no tax is due on estates below this value. 40% must be paid on the amount that exceeds this limit.
Additionally, there is the residence nil-rate band, which provides an extra allowance when passing on the family home to direct descendants, such as children or grand-children, currently standing at £175,000.
The responsibility for paying IHT typically falls on the executors of the estate. Executors must calculate the tax due and ensure payment is made within six months of the person’s death.
When does inheritance tax apply?
The levy is due when the value of the estate surpasses the £325,000 nil-rate band but there are several factors that can influence the final IHT bill.
If the deceased made gifts over £3,000 per year to individuals within seven years before their death, these could also be included in the estate’s value. Taper relief may reduce the IHT due on these gifts, depending on how many years before death they were made.
Exemptions and reliefs
There are several exemptions and reliefs available that can significantly reduce or eliminate the cost or liability:
- Spouse and civil partner exemption: Transfers between spouses or civil partners are entirely exempt from IHT, regardless of the amount.
- Business relief: This can reduce the value of a business or its assets by up to 100% for IHT purposes, potentially lowering the overall tax bill.
- Agricultural relief: Farms and agricultural land may qualify for up to 100% relief from IHT, though the rules are complex and subject to change.
Charitable donations can also reduce the IHT rate from 40% to 36% if at least 10% of the estate is left to charity.
Practical steps to minimise an inheritance tax bill
Given the complicated rules and frequent changes in tax law, it’s recommended to speak with a specialist tax lawyer to navigate complex cases and establish the best strategies for approach.
Making a will is the first crucial step, ensuring that your assets are distributed according to your wishes and that you take advantage of any exemptions and reliefs.
Setting up trusts can also be an effective way to manage your estate and trusts can often allow assets to be passed on without incurring immediate tax charges.
Inheritance Tax can significantly impact the legacy you leave behind but with careful planning you can reduce the burden on your loved ones.