Inheritance Tax planning – What should you consider?

Inheritance tax (IHT) is a tax that is levied on the transfer of assets after someone dies.

IHT can be a significant burden for some, and careful planning can help to ensure that your beneficiaries are not left with a large tax bill.

Understand the current IHT rules

It’s important to understand the current IHT rules and how they may impact your estate.

IHT is currently charged at a rate of 40% on estates over the nil-rate band, which is currently set at £325,000.

There are a number of exemptions and reliefs available that can help reduce the amount of IHT payable, such as the spouse exemption, the annual exemption, and business property relief.

It’s important to understand these rules and how they may apply to your estate.

Consider making lifetime gifts

One way to reduce the amount of IHT payable is to make lifetime gifts.

You can give away up to £3,000 per year without incurring any IHT liability, and you can also make additional gifts of up to £250 to any number of people each year.

In addition, gifts to charity are exempt from IHT.

Making lifetime gifts can help reduce the size of your estate and potentially reduce the amount of IHT payable.

Make use of trusts

Trusts can be a useful tool for IHT planning.

By placing assets into a trust, you can potentially reduce the size of your estate and transfer assets to your beneficiaries tax-efficiently.

There are a number of different types of trusts available, and it’s important to choose the right one for your individual needs and circumstances.

Consider life insurance

Life insurance can be another useful tool for IHT planning.

By taking out a life insurance policy, you can provide a tax-free lump sum to your beneficiaries that can be used to pay any IHT liability on your estate.

Life insurance policies can be written in trust, which means that the proceeds are paid directly to your beneficiaries and are not subject to IHT.

Residence nil rate band

The residence nil rate band (RNRB) reduces the amount of inheritance tax payable on a person’s estate upon their death.

It is in addition to the standard nil rate band, which is the amount that can be inherited tax-free.

It is currently set at £175,000 per person, but this amount is subject to change each tax year.

To be eligible for the RNRB, the property or share of the property being inherited must have been the main residence of the deceased, and it must be left to their direct descendants such as children or grandchildren.

The RNRB is gradually phased out for estates worth more than £2 million and is completely lost for estates worth more than £2.25 million.

It is also possible for the unused portion of a deceased spouse or civil partner’s RNRB to be transferred to the surviving partner’s estate.

The RNRB provides an additional tax allowance for individuals who leave their main residence to their direct descendants upon their death, reducing the amount of inheritance tax payable on their estate.

Changes to pensions

In the Spring budget, the Chancellor announced that the Lifetime Allowance of £1,073,100 is being scrapped.

This means that pensioners who exceed this amount will no longer be taxed at the rate of 25 per cent on the additional income and 50 per cent when withdrawn as a lump sum, known as the Lifetime Allowance (LTA) charge.

The charge will be removed from April 2023 and the LTA will be abolished from April 2024.

The Pensions Annual Allowance was also increased from £40,000 to £60,000.

For more advice on Inheritance Tax or the probate process, get in touch with our experienced probate team.

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