What is inheritance tax and how can it be managed effectively?

Inheritance Tax (IHT) is a tax imposed on the estate of a deceased person before the assets are distributed to their heirs. It is a tax on the transfer of property or assets from the deceased to their beneficiaries. The tax is typically based on the value of the assets left behind after any applicable exemptions or deductions.

It’s important for individuals to plan their estates carefully to minimise the impact of inheritance tax on beneficiaries, which may involve using trusts, gifts or other estate planning strategies.

We caught up with Mark Stubberfield, Head of Wills, Trusts and Probate to answer some frequently asked questions regarding IHT.

Q: What is the current inheritance tax rate?

A: The inheritance tax rate is 40% on the value of the estate above the nil-rate band and any applicable residential nil-rate band (RNRB). However, certain exemptions reliefs may apply, which can reduce the overall tax liability.

Q: What is the threshold for IHT in the UK?

A: The “nil-rate-band” is a tax-free threshold allowing individuals to inherit up to £325,000 without taxation. Traditionally, this threshold increased annually by approximately 3-4%. However, it has remained stagnant since 2009, with no expected rise until at least 2028. Meanwhile, estate values have continued to rise, driven by rising house prices.

In addition to the standard nil-rate band, there is a RNRB which applies when passing on a main residence to a direct descendant, such as a child or grandchild. The RNRB was introduced in 2017 to help families pass on the family home without incurring significant tax liabilities. The RNRB currently is £175,000 per individual.

This would bring eligible estates to claim a total allowance of £500,000, which would still not bring the allowance in line with the increase in house prices.

Q: Who qualifies for the RNRB and is there any eligibility criteria?

A: The RNRB is available to individuals who leave their property to ‘direct descendants’ upon their death.

Eligibility criteria include owning a property and ensuring it is passed on to direct descendants. However, it does also extend to stepchildren, spouses, or children, adopted or foster children meaning that if you never had children, then you are unable to claim this allowance.

If you want to leave a share of your estate to your parents, Godchildren or nieces and nephews – you will not be able to claim RNRB as they are not classed as direct descendants.

Additionally, there are rules regarding the value of the estate, and the property must have been owned on or after a specific date, typically the 7^th July 2015. It’s important to note that certain conditions apply, and eligibility may vary based on individual circumstances.

Q: Can I pass my estate on to multiple descendants under RNRB?

A: Yes, however if your estate is inherited by a combination of direct descendants and individuals who do not meet the eligibility, you might not be eligible to claim the full £175,000.

Q: What happens if I’m married or have a civil partner?

A: In the case of marriage or civil partners, any remaining portion of one’s spouse’s RNRB may transfer to their estate. This provision allows married couples or civil partners to potentially add an additional £350,000 of tax-free allowance, resulting in a tax saving of £140,000.

Q: What about if I gift my property, are there any exemptions on this?

When gifting your property, there are certain exemptions and considerations that may apply. For instance, if you gift your property but continue to reside in it, it may still be considered part of your estate for inheritance tax purposes. However, various exemptions and reliefs may apply depending on factors such as the value of the gift, who the gift is made to, and the time frame involved.

Additionally, if you make a gift that remains within your estate for seven years, in order to qualify for the RNRB, it’s the total value of your estate that is considered, not specifically the value of any lifetime gifts.

Q: If I gift my home to my children before I die, will I avoid inheritance tax?

Many people believe that if you give your children your home during your lifetime, you will avoid inheritance tax, but this rarely works. If you retain an interest in the property after you give it away, which would include living in the property, HMRC will still treat you as owning the property at your death.  This would be seen as a gift with reservation of benefit.

To avoid this, you would need to be paying the new owners full market rent. If someone is living with you, you could give them a share of the property which may not then be seen as a reservation of benefit.

Q: What happens if my loved one goes into care?

If your loved one goes into a care home and has transferred ownership of their property, the Local Authority may perceive this as ‘deliberate deprivation.’ Consequently, they may include the property’s value in the individuals’ assets when determining responsibility for covering care home expenses.

It’s always advisable to get in touch with your solicitor to update and reassess your Will to ensure its tax efficient, thereby this could prevent common issues that may hinder the availability of the RNRB.

If you would like additional information on the above, please contact Mark Stubberfield by clicking the ‘contact us’ button or call Mark on 01732 758545 at our Brighton office. For more information on Wills, Trusts and Probate, please click here.