Even though Inheritance Tax is the one tax you will never pay personally, it is a complex tax that can cause more heartache than most other UK taxes. If you plan to pass on assets or money after you die, your heirs could face an Inheritance Tax bill of up to 40% of your estate. There is a reduced rate of 36% if you leave 10% or more of your net estate to charity.
Your estate is the market value of everything you own at the date you pass away. It includes assets you held in your name only and your share of assets you held jointly with someone else.
The following are examples of assets that will be part of your estate:
- Your home and its contents
- Your car
- Bank and building society accounts
- Cash and savings in the bank
- Investments (for example, shares)
- Businesses you own
- Pay-outs from life insurance policies not held in Trust
Your estate also includes the total value of certain gifts you have made:
- in the seven years before your death
- at any time if you continued to benefit from the gifted property (these are known as ‘gifts with reservation of benefit’)
Settled out of your estate
Any money you owe, for example if you were paying a mortgage, and any funeral expenses will be taken from the value of your estate before Inheritance Tax is calculated provided those debts are settled out of your estate.
In extreme cases your heirs could be forced to take out loans or sell property to pay the tax. So it is important to take the time to understand the overall position your heirs will be in, and planning ahead to minimise the amount of Inheritance Tax due.
Number of exemptions
There is usually no tax to pay in the 2021/22 tax year if the net value of your estate is less than £325,000 (called the Nil-Rate Band) and there are a number of exemptions and reliefs that may apply. You may also be able to benefit from your late spouse or registered civil partner’s Nil-Rate Band.
If you are married or in a registered civil partnership, any Nil-Rate Band that is not used by the first to die can be transferred to the survivor to a maximum of £650,000 (2021/22 tax year). Nil-Rate bands are only transferrable between spouses and registered civil partners.
During your lifetime
Any assets you give to your spouse or registered civil partner either during your lifetime or in your Will are exempt from Inheritance Tax and do not affect your Nil-Rate Band.
Since 6 April 2015 you have also been able to take advantage of the ‘Residence Nil-Rate Band’, also known as the ‘main residence’ band. This is additional to the £325,000 Nil-Rate Band and is currently worth up to £175,000 (2021/22 tax year) if you pass on a main residence to a direct descendant such as children or grandchildren and, broadly speaking, there is no trust involved.
Maximum total tax-free
Like the Nil-Rate Band, any unused Residence Nil-Rate Band can be added to a surviving spouse or registered civil partner’s at the time of their death.
When combined with the Nil-Rate Band, this can be a valuable relief. For deaths in the tax years 2021/22, the maximum total tax-free Inheritance Tax allowance for an individual is £500,000 – that is £325,000 Nil-Rate Band, plus £175,000 additional Residence Nil-Rate Band allowance.
For a married couple with children, they will be able to pass on £1 million in total – two amounts of £325,000 (£650,000) and two amounts of £175,000 (£350,000).
There is a tapered withdrawal of the additional Nil-Rate band for estates with a net value of more than £2 million. This is at a withdrawal rate of £1 for every £2 over this threshold.
Growing your wealth
Goals based investing
- Cash flow modelling
- Creating a financial roadmap
- Investment objectives
- Timescales and market activity and the impact of losses
- ‘What if’ scenarios
- Discussing legacy planning with your loved ones
- Inheritance Tax (IHT)
- Inheritance Tax Residence Nil Rate Band (RNRB)
- Lasting power of attorney
- Lifetime transfers
- Making a Will
- Preserving wealth for future generations
- Protecting your assets for the next generation
- Slicing up your wealth pie
- Children’s pensions
- Defined benefit (or final salary) pensions
- Defined contribution pensions
- Personal pensions
- Self-Invested Personal Pensions (SIPPs)
- The state pension
- Annual allowance and lifetime allowance limits
- Busting myths about pensions
- Increases to pension age and new normal minimum pension age
- Pension freedoms
- Pension withdrawal methods
- The lifetime allowance
- Delaying retirement
- Generating income from investments throughout your retirement years
- Importance of a retirement wealth check
- Retirement goal setting
- Retirement planning
- Reviewing your retirement plan
- Staggered retirement
- Taking control of your retirement plans
- What can I do with my pension?
- What happens to my pension on death?
- Market timing
- Minimising risk
- Multiple asset classes
- Portfolio insulation
- Pound cost averaging
- Principles of investing