Inheritance Tax planning

A voluntary levy, paid by those who distrust their heirs more than they dislike the Inland Revenue.” Lord Jenkins of Hillhead, former Home Secretary.

Inheritance tax is charged at 40% on the value of your estate over the tax-free allowances, when you die. Each person has a ‘transferable nil rate band’ of £325,000 and also a ‘main residence transferable allowance’ (which relates to your house) of £175,000 in 2020/21, if your net estate is worth less than £2m.

If you are married or in a civil partnership, transfers between spouses are inheritance tax free, so often there is no tax to pay on the first death, but the couple’s joint estate is taxable on the second death. Any unused allowances from the first death can be transferred to the surviving spouse’s estate and set against the tax liability on the second death. This means that, in many cases, the good news is that you can leave assets worth £1m to your children or other beneficiaries, free of inheritance tax.

It may be possible to structure your Will tax-efficiently, in order to minimise the amount of inheritance tax payable on larger estates. As always, what can be done will depend very much on your individual circumstances, but below are a few examples:

Example 1 – update old ‘nil rate band’ Wills to save £60,000 in tax

If you already have a Will, you may need to revisit it now in order to ensure that your estate benefits from the new, ‘main residence transferable allowance’ of £150,000, introduced in 2017. This allowance is only available if your assets are left directly to your ‘descendants’. In a lot of older, nil rate band Wills, assets were left on a discretionary trust for the surviving spouse and children. As the assets were not left to direct descendants outright, your estate may not qualify for the main residence transferable allowance, if your Wills are not updated to take advantage of this new, valuable allowance. You may be able to save 40% tax on £150,000, i.e. £60,000, simply by updating your Will.

Example 2 – nil rate band legacy to children/grandchildren on the first death

Another example would be to consider making a Will leaving some of your assets to your children or grandchildren after the death of the first spouse, instead of leaving everything to the surviving spouse. This can be a particularly useful piece of planning if you have assets which you expect to grow in value significantly in the next few years, because the growth can then take place outside your joint estate.

Example 3 – leave half of your house to your children on the first death

You could leave your half share of the house to your children on the first death, instead of it going to the surviving spouse. This can help to reduce the inheritance tax bill on the second death, and it can also protect that share of the house from future nursing home fees.

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