DS Wills & Estate Planning

Inheritance Tax- The Basics

in News by Danielle Sutcliffe 09-08-2018

A new report by HMRC has found that on average, the Inheritance Tax (IHT) payable on estates in the North East is £132,000! So is there anything we can do about it?

What is the current threshold?

IHT is a tax that is paid on the estate of someone that has died. An estate can be made up of a variety of assets such as property, savings and personal possessions. The current threshold at which point IHT is payable is £325,000 per person. This is known as the Nil Rate Band (NRB). If your estate is less than this, or if you are gifting your entire estate to an exempt beneficiary (such as a spouse, charity or political party) then there will be no IHT liability. If your estate is liable to IHT, then it will be payable at a rate of 40% on anything over the NRB.

Example:

Estate value: £500,000

- NRB: - £325,000

Taxable estate: = £175,000

IHT payable = £70,000 (40% of £175,000)

The new RNRB

In April 2017, the Government introduced a new Residence Nil Rate Band which can apply to estates where a property is gifted to lineal descendants (children or grandchildren). This new band may increase your threshold to a maximum of £450,000, depending upon the value of your property.

Example

Estate value: £500,000

- NRB: - £325,000

- RNRB: - £125,000

Taxable estate: = £50,000

IHT payable = £20,000 (40% of £50,000)

Couples and IHT

Any gift made to a spouse is exempt from IHT. This is useful as generally the deceased will leave everything to their surviving spouse on first death, meaning that the first spouse to die has not made use of their £325,000 NRB. When the second spouse passes away and leaves their estate to their chosen beneficiaries (often children or other family members) then IHT may become payable on the estate as children are not exempt beneficiaries. However, the executors of the second estate are able to use the NRB from the first estate and create a double NRB of £650,000. Providing the assets passed on to their children are below this value, then there will be no IHT payable.

Unfortunately, the same does not apply to unmarried couples even if they are co-habiting or have been in a relationship for many years. In this instance, any gifts to each other would not be exempt from IHT.

Example

First partner passes away leaving an estate of £350,000 to their surviving partner. IHT would become payable on £25,000 (once the NRB had been utilised), leaving a liability of £10,000.

The second partner then passes away. Their estate combined with what they inherited from their late partner is £500,000. IHT would be payable on this estate at £70,000.

If this couple were married, the gift from the first partner to the second would be exempt from IHT. On second death there would have been no IHT payable as their estate would have been under the double NRB.

Is there any good news for unmarried couples?

Yes. Providing they put the relevant trust provisions into their wills, they are able to make use of each other’s NRB through the use of loans. This is a type of discretionary trust and can be a very useful IHT saving tool.