July 27, 2023
Inheritance Tax (IHT) is nothing new. Paying duties following a death has been a way of raising money and keeping capital in circulation for centuries. However, whereas once it was only a problem for the very rich, the complications of Inheritance Tax and intergenerational wealth now impact a much wider section of society. In the 2022-23 tax year bereaved families paid over £6billion into the HMRC coffers. This is the biggest single rise in IHT paid since 2015-161 and illustrates how the responsibilities of IHT are being shouldered by more and more families like yours.
At Wells & Co we are committed to helping you meet all of your tax obligations in a thorough, fair and efficient manner. For many of our clients IHT is a primary concern, so let’s start with getting to grips with exactly how it works.
When an individual passes away, their personal representatives are responsible for any IHT due. Typically, payment is due within six months of the death, which can cause obvious problems if you are relying on the wealth tied up in property to offset the inherited value of that property. This could result in liable individuals being forced to take out loans to cover IHT. Not an ideal situation.
Anyone who has their permanent home in the UK is liable to pay IHT on the “transfer of value.” This includes full worldwide assets, except for certain exclusions. If someone is not domiciled in the UK, i.e. if this is not their permanent home, they are only subject to IHT for their properties in the UK.
The first £325k of a person’s estate is taxed at 0%. In short, if the full value of the deceased’s estate is below this ‘nil-band rate’, no IHT is due. However, without further mitigation, all value above this figure is taxed at a flat 40%. This table shows the dramatic impact this can have on your estate.
Depending on the relationship between the deceased and the person inheriting the estate, there are important mitigations available. For example, if the inheritor is a direct lineal descendant and are inheriting the deceased’s main residence, they have an additional allowance of £175k. This is known as the Residence Nil-Rate Band (RNRB) and exists to offset the reality that the family home often makes up a disproportionately large portion of the estate.
Both the Nil-Rate Band and RNRB are frozen until April 2028.
Any transfer of value between spouses or civil partners is fully tax-exempt, whether it is made during the lifetime or at death. This does not apply to ‘common law’ partners; the two individuals must be legally married or registered as civil partners – though you don’t have to be living together.
It is worth noting that, if you are transferring your estate to a spouse or partner who is domiciled outside the UK, the exemption is capped at the nil-band rate, or £325k.
You can make tax-exempt gift donations of up to £3,000 per year. The exemption is once per donor, not per recipient, and any allowance not used can be carried forward into one subsequent year. You can make an unlimited number of £250 gifts (but not to the person who has received the £3,000 detailed above.)
Some larger transfers of value, made during an individual’s lifetime, are potentially tax-exempt. These include outright gifts, transfer into certain trusts. However these Potentially Exempt Transfers (PETs) become subject to IHT if the donor dies within seven years of the transfer. This is something to keep in mind, as unexpected events could swiftly impact your financial position. It is always good practice to take advice here. Having a plan in place with your adviser and reviewing this regularly is a good way to keep all of this on track and keeping up to date on changes in legislation.
The absolute first step is to draw up a comprehensive Will. There is a great deal of complexity navigating IHT, but a good Will can really help. At Wells & Co. we can introduce you to experts who can help you draw up an effective Will, or look-over your current Will to ensure it is IHT-efficient.
These are the basic facts about Inheritance Tax. Next month, in Stage 2 of this Guide To… we’ll look in more detail at what you can do to mitigate your loved ones’ liability, and ensure that HMRC do not take the biggest share of your estate.
If you have concerns or questions right now, we’d love you to get in touch. Here at Wells & Co. we have the expertise and experience to help steer you through this complex tax minefield.
Contact us on 0800 038 5431
The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief depends on individual circumstances.
Will writing involves the referral to a service that is separate and distinct to those offered by St. James’s Place. Wills and Trusts are not regulated by the Financial Conduct Authority.
1 Inheritance Tax statistics: commentary – GOV.UK (www.gov.uk), accessed 28 June 2023
SJP Approved: 7/8/2023
