Inheritance Tax Planning

Inheritance tax (IHT) is no longer paid only by the very wealthy.  As property prices rise to ever new heights, and the value of savings and other possessions increase, more and more people are being caught by it.

As things stand, the tax payable very much depends on the value of all your assets (obviously!) but also if you are married (or in a civil partnership) and then less obviously whether or not you have children. There are other reliefs as well depending on any business assets you own.

Part of our initial discussion with you always covers the general position on IHT as it relates to you.  Sometimes these conversations are re-assuring as clients realise that there is unlikely to be an IHT liability but for others it allows them to plan to reduce or remove that potential liability over time.

Everyone has a nil rate band (NRB) of £325,000 when you die, if you have no children or step children and are not married (or in a civil partnership) then the amount in excess of £325,000 will be subject to IHT at 40%.

Residence Nil rate Band (RNRB)

An additional IHT nil rate band is available where the family home is inherited by children or grandchildren on deaths after 5 April 2017. The maximum RNRB is currently £175,000.

The residence nil rate band (RNRB) is transferable (similar to the main nil rate band) between spouses and civil partners. That means that on the second death of a married couple (or in a civil partnership), provided that the estate is worth less than £1M, no IHT is payable (2 x £325,000 + 2 x £175,000).

However, anyone with a net estate over £2M will begin to see their RNRB reduced by £1 for £2 until it's completely lost once the estate is over £2.35M or £2.7M where someone has inherited a full RNRB from a deceased spouse or civil partner.

The net estate is the value after deducting any debts, including an outstanding mortgages or those incurred by equity release, but excluding IHT exemptions such as spousal exemption or Business Relief, on qualifying assets.

Outstanding debts through mortgages or equity release could also affect the amount of RNRB available if they reduce the net value of the home below the maximum RNRB.

The RNRB only applies to transfers to children and grandchildren and their spouses. Those without children will miss out.

Clients who could benefit from the RNRB may need to revisit their existing wills to ensure they continue to reflect their wishes and remain as tax efficient as possible.

Fortunately, there are ways to minimise the impact of IHT, or to eliminate it altogether.  All it takes is a little careful tax planning. 

For clients requiring specific IHT advice with independent financial advisers, HQN Financial Management Ltd and can refer clients to them for suitable regulated advice.

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