"Inheritance Tax is, broadly speaking a voluntary levy paid by those who distrust their heirs more than they dislike the Inland Revenue.”
Inheritance tax can seem a real sting in the tail for those of us who have worked hard and paid taxes all our lives. When you die, Inheritance tax (IHT) is payable on everything you own of value including:
- your home
- savings and investment
- works of art and antiques
- other properties or land, including second homes and overseas
This list of ‘everything of value’ is known as your estate, and it’s the total value of your estate that is liable to Inheritance Tax. However, with some careful planning, you can reduce the amount of IHT due on your estate.
Inheritance Tax nil-rate band
There is normally no Inheritance Tax due if the total value of your estate is below the Inheritance Tax nil-rate band (NRB) threshold. This currently stands at £325,000 for tax years up to and including 2020/21. However, with house prices rising post-lockdown, it’s easy to see how many properties may be worth the threshold amount alone.
IHT is also not due if you choose to leave everything to your spouse or registered civil partner, or if you leave everything to an “exempt beneficiary” such as a charity.
If your spouse or civil partner died and did not use up their own NRB, your own NRB can be increased by the percentage of unused NRB by your deceased civil partner or spouse.
Married or not?
It’s important to remember that if you are not married to your partner, or not in a civil partnership, no matter how long you have been together, your partner has no automatic rights under the Inheritance Tax rules. There is no such thing as a “common law spouse” in law.
When you leave your estate to someone other than your spouse or civil partner, or another exempt beneficiary, Inheritance Tax of 40% will need to be paid on any amount that exceeds the NRB threshold.
Residence nil-rate band (RNRB)
The residence nil-rate band (RNRB) potentially gives you an additional allowance to be used to reduce the Inheritance Tax against your home. This usually applies if you leave your home to a direct descendent, such as step-children, adopted children and foster children, but not nieces, nephews or siblings. However, if your estate is valued at over £2million, the RNRB starts to be tapered away by £1 for every £2 on death.
Gifts during your lifetime
One effective way to reduce IHT liability is to use Trusts and gifts made during your lifetime. That way, family and friends can benefit from a gift whilst you are alive. (For more details, see our recent article on“Financial gifts, IHT and the seven year rule". )
Trusts are a method of ring fencing assets and preserving them for future generations. There are currently three main types of trusts:
- Bare (Absolute) trust
- Interest in possession trust
- Discretionary trust
For more details, see our“Why you need a Trust”article .
Life cover for IHT
If you don’t want to give away assets while you’re still alive, you could opt to take out life cover. When you die, this policy would pay out an amount equal to your estimated Inheritance Tax liability. A life policy is most effective when it is written in an appropriate trust. This ensures the proceeds of the cover are paid outside of your estate, so are not liable for IHT themselves! Our sister company Panthera Wealth is able to provide advice on setting up life cover.
Safeguarding more of what is yours for future generations
No one likes to think about their own mortality, so Inheritance Tax is a subject that may seem easy to avoid or ignore. Please don’t. Making robust, financially advantageous IHT plans will give you peace of mind and assurance that your estate will benefit others to its fullest extent.
At Panthera Estate Planning, we offer professional advice and help with appropriate planning. Every plan we create is bespoke to you, as everyone’s situation is different. To discuss your circumstances individually, please:
Panthera Estate Planning
Protecting your hard-earned legacy