Inheritance Tax (IHT) can create substantial bills for families after their loved ones have passed away. With rising property prices, it’s thought more and more households will fall into the IHT trap without realizing the consequences for those that they leave behind. In fact, IHT receipts for 2021/22 were £718.2 billion!
Inheritance tax is payable where a net estate is valued at more than £325,000. With average house prices for a detached house in 2022 at £469,095, many families will fall within this threshold. The standard Inheritance Tax rate is 40% but this can be reduced to 36% if you leave 10% of your estate to charity.
If the estate is worth less than £325,000 or if everything is left a spouse, civil partner, charity or community club then no inheritance tax is payable.
The good news is that there is also an additional Inheritance Tax allowance where the family home is left to your direct descendants (i.e. children, grandchildren etc). This is known as the Residence Nil Rate Band and is an extra sum of £175,000 (in addition to the ordinary nil rate band of £325,000) before tax is payable but the estate must be valued at less than £2 million.
Any unused tax allowances can be passed between spouses meaning that the second of a couple to die could potentially have an inheritance tax allowance of £1 million.
It’s also possible to reduce your inheritance tax liabilities by making lifetime gifts of up to £3,000 each year plus individual gifts of £250 to people you know. You can also give gifts to relatives who are getting married, free of inheritance tax along with gifts to charities and political parties.
There’s no doubt, Inheritance Tax can be a complicated area of tax law and it’s always advisable to seek qualified personalized advice to maximise your tax allowances and structure your estate in the most tax efficient way possible.
If you’d like to speak to the team about your Inheritance Tax queries, please get in touch.