The inheritance tax (IHT) threshold has been frozen until 2026 but it is still important to plan ahead if you want to leave your estate to loved ones after you die – and don’t want your beneficiaries to have to pay up to 40% tax.
It’s vital to consider IHT in your end-of-life financial planning in order to minimise the amount of tax loved ones will have to pay after you die, and to ensure as much of your estate as possible goes to your chosen beneficiaries.
What Are The IHT Rules?
There is a tax-free inheritance allowance called the nil-rate band that applies to us all. Thanks to this band, your loved ones can inherit up to £325,000 of your estate without having to pay IHT. Anything above this amount will be subject to the standard 40% inheritance tax rate.
With regard to property, there is also a residence nil-rate band which can mean an extra tax-free allowance of £175,000 to use if you leave a direct descendant a property you’ve lived in.
When Do The Nil Rate Bands Increase?
The nil-rate band has remained the same since 2011. However, the residence nil-rate band normally rises annually with inflation and was due to increase in April 2021 but it was announced the IHT threshold will be frozen until 2026.
Why Do I Still Need To Plan With The IHT Freeze?
Without careful planning, a large proportion of your assets could be lost and not reach your intended recipients due to inheritance tax being applied to them. Preparing for your end-of-life financial planning means making the most of your assets and ensuring as much as possible reaches your loved ones.
IHT Planning Options
Inheritance tax is complex so it’s always advisable to speak to a professional first about your financial plans for loved ones after you die.
The good news is that there are ways to minimise the amount of inheritance tax loved ones have to pay on inherited assets from your estate, with careful planning and through using the right option for you.
Gift your assets early
By gifting money or another asset to a loved one before you die, you can cut the amount of IHT due on your estate. However, timing is key as the gift needs to be made 7 or more years before your death for the recipient not to pay any IHT on it. If you die within 7 years of gifting the money or asset then IHT can be applied, depending on the value and type of gift.
Team up with your partner
One option is to pool your nil-rate band allowance with your spouse or partner. Normally, spouses and civil partners inherit tax-free from their deceased partner which means you can make use of the allowance to which your partner was entitled to, too.
If you’ve been left their entire estate, you could apply your own allowance together with your partner’s when passing on your estate. This effectively would double what you can leave for your beneficiaries without incurring any liability to inheritance tax. If your partner used some of their allowance for IHT then another option open to you is to use the percentage of the allowance that they didn’t use and add this to your allowance.
Give to charity
Assets left to a qualifying charity are exempt from IHT. Furthermore, if you leave at least 10% of your estate’s value to charity and this surpasses the nil-rate band to charity, you can cut the IHT due on the rest of your estate from 40% to 36%.
How We Can Help You With Your Inheritance Tax Planning
If you intend to leave money or property or assets to family or friends after you die then you need to consider IHT and how it will likely impact upon your decisions. Our specialist inheritance tax planning team are here to help you understand how IHT is applied and the options open to you to minimise the amount of tax your beneficiaries will have to pay.
Even with the IHT thresholds frozen until 2026, now is the perfect time to plan for inheritance tax and to make sure as much of your estate as possible reaches loved ones.