Every individual in the UK has the benefit of a tax-free allowance on death, called the Nil Rate Band. This is currently £325,000.
Where an individual’s net assets exceed the Nil Rate Band when they die, then Inheritance Tax (or IHT as it is more commonly referred to), is payable at 40 per cent on the balance over the Nil Rate Band.
So, for example, if your net estate totals £350,000, then you would receive the first £325,000 of your estate free of IHT and would only pay IHT on the remaining £25,000 at 40 per cent, ie £10,000.
There are several options available to an individual to mitigate their IHT liability, so that either a reduction in IHT is caused, or so that no IHT is payable.
For example, a gift to a surviving spouse or civil partner (either during their lifetime or under a will), is fully exempt from IHT.
A gift of residue to charity of at least ten per cent will reduce the IHT payable from 40 per cent to
36 per cent.
A gift of all residue to charity will be fully exempt from IHT.
There are also now rules available to transfer the unused Nil Rate Band of a pre-deceased spouse or civil partner that can be added to the surviving spouse or civil partner’s Nil Rate Band, thus creating potentially a maximum IHT allowance of £650,000 for a married couple or civil partners.
IHT planning can be very important if your estate is likely to exceed the single or joint Nil Rate Band threshold depending on whether you are a couple or not. For example, gifts made outside a seven-year period before death will not usually be considered for the purpose of IHT.
Any gift made within seven years, can be taken into account.
Annual gifts not exceeding a total of £3,000 are exempt, as are small individual gifts of £250 per person each year.
Also, regular gifts from excess income and gifts in contemplation of marriage (subject to limitations) are a much-missed opportunity to save on IHT.
In order to minimise your potential IHT liability on death, it is strongly recommended that you seek legal advice as it is a complex area of law.
A specialised solicitor will consider the full extent of your estate, and provide full and practical advice in respect of whether IHT mitigation is appropriate for you.