What happens if I want to protect my assets from Inheritance Tax (IHT)?

In the UK, individuals and families who wish to pass on their legacy need to tread very carefully in order to ensure they are not hit with a hefty inheritance tax (IHT) bill.
IHT is applicable on the net value of the estate (after deducting IHT exemptions, reliefs and the nil rate band) and the tax rate applicable is 40%.
£325,000 is the nil rate band and estates valued at £325,000 or less are exempt from IHT. This threshold has remained frozen at this amount for a number of years and, despite ever-rising wealth across the country.
Inheritance tax payments have hit record highs, according to data released by HM Revenue & Customs (HMRC).
Inheritance tax (IHT) receipts grew by £160 million to a total of £5.4 billion in the year to March 2019.
Is the tax planning in your Will out of date?
The additional residence nil rate band (RNRB) was introduced in April 2017, this is an additional tax-free threshold families can tap into if they plan on leaving a residential property to their direct lineal descendants in their Wills. Planning is required to benefit from RNRB because if the estate exceeds £2m the RNRB will go down. Majority of the Wills that are made are mirror Wills that leaves the estate to the surviving spouse as these are the most competitively priced Wills offered by solicitors. The result is on second death the value of the estate may have grown to attract additional IHT.
During the next two years increases in the RNRB are expected to reduce IHT receipts. This is because under the RNRB, married couples and individuals in civil partnerships will have an extra £350,000 of IHT-free allowance per couple, but this will not be fully phased in until the 2020/21 tax year. However, if the value of the individual’s estate is above £2m, the residence nil rate band is reduced by £1 for every £2 above this threshold.
Individuals and families who want to explore ways of mitigating their IHT liability should investigate all of their options in order to determine which methods of tax planning will benefit them the most.
So, if you’re giving away your home to your children or grandchildren, you may qualify for the RNRB, meaning the estate will be able to utilise additional threshold before IHT becomes due on your estate. This is a further £150,000 in 2019/20, then £175,000 in 2020/21. It will subsequently increase in line with the Consumer Price Index (CPI) from 2021/22 onwards.
The RNRB is added onto the standard nil-rate band; for instance, in 2019/20, your inheritance tax threshold is £475,000 (£325,000 + £150,000), but it will only apply up to the value of your property.
There are many other beneficial tax savings available. For example, individuals can reduce the rate at which they will incur IHT on the total value of their estate bypassing a portion of it to a charity when they die.
By leaving 10% of their net estate to a charity, individuals will pay IHT at a rate of just 36% as opposed to 40%, for example.
There are a number of ways in which families and individuals can mitigate their eventual IHT liability and it is always worth seeking tailored advice to determine which methods are most suitable. To find out how our expert tax team can help, get in touch today.

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