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Legal News | 31.08.23

Is your home tipping you over the edge?

Is your home tipping you over the edge?

Inheritance tax (IHT) revenues are set to reach an all-time high, with analysts forecasting that HMRC are set to receive a record £7.8billion this financial year. This is a 10% increase on the government reported figures for the previous financial year. The increase has been attributed to the spike in house prices post-pandemic, which has led to more estates becoming liable to IHT.

Understanding Inheritance Tax

IHT is a tax paid on the estate (property, money, and possessions) of someone who has passed away. The tax applies if the value of the estate exceeds a certain threshold. In the UK, the standard threshold is £325,000, this is known as the nil-rate band (NRB). The NRB can rise to £500,000 if the individual leaves their home to a child or grandchild.

Estates which are valued above the NRB threshold are typically subject to a 40% tax rate.

Effective Strategies for Reducing Inheritance Tax Liability

If you are a homeowner, you may wish to consider estate planning to reduce your IHT liability.

1.Annual Gifting and Exemptions

Making use of annual gift allowances can reduce your estate’s value over time. Each tax year, you can gift up to £3,000 without the need to survive the gift by seven years for it to fall out of your estate. If you do not use your annual allowance, you may carry the balance forward from the previous tax year into the next year. Additionally, small gifts of up to £250 to multiple individuals are exempt.

2.Establishing Trusts

Trusts can be powerful tools for protecting your assets and minimizing IHT. By placing assets in a trust, you can remove them from your estate’s value while maintaining control over how they’re distributed. Trusts will however be subject to their own taxes.

3.Business Relief (BR) and Agricultural Relief (AR)

Transfers of qualifying business property and agricultural property can be eligible for relief, either reducing the value subject to IHT or exempting them entirely.

4.Charitable Giving

Donations to charities and some political parties are exempt from IHT. You can also reduce your IHT rate from 40% to 36% if you leave at least 10% of your estate to charity.

5.Spousal Exemption and NRB Transfers

Assets given or left to your spouse or civil partner are generally exempt from IHT. If a spouse or civil partner does not use their entire NRB, it may be transferred to their surviving spouse or civil partner, potentially doubling the threshold.

6.Potentially Exempt Transfers (PETs)

The total value of gifts made more than seven years before your passing is excluded from your estate for IHT purposes. These are known as PETs and can be an effective way to reduce IHT liability.

While there have been whispers of a conservative backed abolition of IHT, it would seem unlikely that the government would forgo such an enormous revenue stream any time soon. It is therefore important to consider preparing for the future sooner rather than later.

If you would like further information on inheritance tax or require assistance with estate planning, please get in touch with your usual Wansbroughs’ contact or email the Private Client Team at wealth@wansbroughs.com.


Posted By Our Wills, Tax, Trusts & Probate Team