Passing on wealth to the next generation

Everyone wants to ensure that their children and grandchildren can live the best possible life and leaving an inheritance after death is one way of ensuring they are properly cared for.
However, the UK has a system of Inheritance Tax (IHT) which is designed to redistribute wealth on death.
IHT is applicable on the net value of the estate after deducting IHT exemptions, reliefs and the nil-rate band at the applicable rate of 40 per cent.
Thankfully every individual can make use of the nil rate band, which ensure that estates valued at £325,000 or less are exempt from IHT.
This threshold has remained frozen at this amount for many years and, despite ever-rising wealth across the country.
Unfortunately, despite this relief the Treasury continues to record a growth in the amount of IHT receipts it received and in the year to March 2019 it had recovered £5.4 billion – up by more than 13 per cent on the figures for 2016.
To provide a fairer system and to take into consideration the growing value of residential property the additional residence nil rate band (RNRB) was introduced in April 2017.
This is an additional tax-free threshold that families can tap into if they plan on leaving a residential property to their direct lineal descendants in their Wills.
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 up to £1 million of relief where a property is passed to a direct descendant, but this will not be fully phased in until the 2020/21 tax year.
Planning is required to benefit from RNRB because if the estate exceeds £2m the RNRB will go down. 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 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 per cent of their net estate to a charity, individuals will pay IHT at a rate of just 36 per cent as opposed to 40 per cent, for example.
There are many 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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