What is Inheritance Tax?

December 10, 2023

What is Inheritance Tax?

By

Graham Hinitt

25th November 2023

In 2021-2022, HMRC received £6.1billion pounds in Inheritance Tax revenue – up 14% from the previous tax year. The Financial Times highlights how It is not just a problem for the super-wealthy. Many ordinary families are often hit by an unexpected inheritance tax bill because of a lack of awareness and planning. We believe everyone should consider their inheritance tax position regularly so that they have the information and options to minimise or even avoid exposure to this type of tax. In this article, we will answer the question almost every client asks ‘What is inheritance tax?’ and give some options on what you can do about it.

What is Inheritance Tax?
Inheritance Tax most frequently arises on death but can be charged during your lifetime if you transfer assets into a trust.

On death, Inheritance Tax will be due if your taxable estate exceeds your available allowances and reliefs (see below).

Your taxable estate includes:

• Property and Land (including your home)
• Possessions (including your car, jewellery, artwork, and house contents)
• Money (Savings, investments, cryptocurrency)
• Business (e.g. shares of a limited company or partnership or sole trader)
• Life insurance

If property or bank accounts are owned jointly with others although the legal ownership of these assets passes to the surviving owner, generally half the value is included in the deceased’s estate for inheritance tax purposes.

Pensions, death in service benefits and life insurance written into trust are not included in your estate.

Your taxable estate can be reduced by:

• Mortgages and loans
• Credit cards and bills
• Funeral expenses (not prepaid funeral plans)

Exemptions and reliefs are then applied to your net estate value. If this is below the threshold, no Inheritance Tax is due. If it is above, then the excess suffers 40% tax.

What are the current allowances?
Every individual has an inheritance tax allowance called ‘The Nil Rate Band’ – this is currently £325,000. The amount of Nil Rate Band you have available on death depends on whether you have given away money (above exempt amounts) or made a gift into a trust within seven years of your death. No IHT is payable if your estate is below the available Nil Rate Band.

Spouse (Civil Partner) Exemption
UK-domiciled married couples can leave an unlimited amount to your spouse or civil partner. There is no IHT due to the spouse exemption. Giving assets to a spouse or civil partner during life or death does not use up your nil-rate band. Different rules apply for married couples where one spouse is UK domiciled and the other is not.

Unused IHT allowances between married couples and civil partners are transferable. A married couple can have a combined allowance of £650,000 plus the RNRB if applicable. This is a maximum of £1,000,000.

When the surviving spouse dies, the unused allowance needs to be claimed by the executor. Your choice of executor is important so that the right reliefs are claimed
and the correct tax is paid.

If you leave any of your estate to someone other than your spouse or civil partner, any amounts exceeding available allowances will be subject to IHT at 40%. By making a will you can ensure your estate benefits from using the spousal exemption and other reliefs. If you are married with children, for example, the division of your estate through the rules of intestacy could result in your family being caught out and potentially hit twice with an IHT bill.

What about unmarried couples?

Unmarried couples do not have transferable allowances and are treated as single regardless of how long they have been together or if they have children. Unmarried couples are also not provided for by the rules of intestacy so it is important that unmarried couples
make a will and consider IHT planning options early so IHT on first death can be minimised.

What is the Residence Nil Rate Band?
There is an additional relief of up to £175,000 known as ‘The Residence Nil Rate Band’ (RNRB). Several conditions apply to the availability of this relief, including:

• It only applies if the property (or proceeds) goes to qualifying beneficiaries e.g. children, grandchildren, stepchildren etc. It does not include nieces or nephews.
• It applies only to property that has been lived in by the deceased. It excludes properties that are buy-to-let.
• The RNRB is available if the estate is less than £ 2 million. At £2.35 million (£2.7m couples), no RNRB is available. Between these amounts, tapering rules apply.
• The value of the RNRB is a maximum of £175,000 (or £350,000 for a married couple). If the value of the property is less, the relief is limited to the property value.

The property does not need to be owned at death to qualify for the RNRB. The RNRB is still available if you have downsized or sold your property to move into residential care or with a relative. You should keep records of any sale.

Are there any other reliefs?

Yes. Business Property Relief and Agricultural Property Relief are the most common. If you own a business or agricultural land then your executors will need to establish whether your estate qualifies for these reliefs. There are some more obscure reliefs available also for woodland and heritage property and would require specialist assessment.

Points to consider in relation to Inheritance Tax:

1. There is not a one size fits all approach. Make sure you have an up-to-date will and regularly review this.
2. Talk to us about how trusts (set up in your lifetime and by will) can help with planning.
3. Seek independent financial advice early so that more options are available to you.
4. Tax rules and allowances can change so you should keep your planning under review.
5. Make gifts early to maximise the chance of your gift being exempt after 7 years.
6. Use annual allowances and other exemptions.
7. Be aware that if making a gift, you do not retain a benefit from it, e.g. gifting a holiday home to a child and using it regularly without paying market rent. It could be classed
   as a gift with reservation of benefit and included in your taxable estate.

We hope this provides a useful introduction. It is not tax or legal advice and you should always seek advice relevant to your own situation. Tax rules and allowances do change so
you should keep your planning under review.

Contact Matrix Estate Planning for a no-obligation consultation.