My colleague, Felicity John wrote an article on How can inheritance tax be paid if there is no cash available in the estate? In this article, I am taking you back to the fundamental principle of what inheritance tax is and when your estate is likely to have to pay it. I will look only at inheritance tax due on your death and not on inheritance tax chargeable gifts made during your lifetime.
What is inheritance tax?
Inheritance tax is a levy on the estate (the property, money and possessions) of someone who has died. Inheritance tax is paid to HM Revenue and Customs (HMRC) and is paid by the Executor(s) (if there is a Will) or otherwise the Personal Representative(s) from available funds in an estate. The tax is usually charged at the standard rate of 40%. If, however, 10% or more of your overall estate has been left to charity, then a reduced rate of 36% can apply.
When will my estate pay inheritance tax?
Not every estate will be liable to pay IHT with the following not paying any inheritance tax at all.
- Estates under the £325,000 tax free threshold
- Estates over the £325,000 tax free threshold that are left to spouses, civil partners, charities or community amateur sports clubs
The £325,000 IHT threshold referred to above is also known as the Nil Rate Band (NRB) allowance, which is available to all individuals and can be set against all asset types on your death. This means that any part of your estate up to the NRB threshold is chargeable to IHT at a rate of 0%. Anything over and above the available NRB threshold is usually chargeable to IHT at the standard 40% IHT rate, subject to certain exemptions. This £325,000 figure is subject to any taxable (because of your death) lifetime gifting that you have done in the seven years prior to you passing away. It is also worth noting that the figure itself could change by the time of your death if a successive Government choose to alter the current threshold that has been in place since 2009. At present, this seems unlikely due to the ever-increasing record receipts for IHT that have been collected by HMRC with keeping the threshold as it was in 2009, coupled with soaring property prices catapulting more estates than ever over that threshold and into paying Inheritance Tax.
The Residence Nil Rate Band and inheritance tax
There is also another allowance available to increase your estate’s threshold for IHT on your death. The Residence Nil Rate Band (RNRB) provides a potential extra £175,000 to the available IHT threshold in your estate on your death, meaning that you could have £500,000 available to you at the 0% rate, as opposed to £325,000. The RNRB allowance is subject to you leaving your home, or a share of it, to your children (which includes adopted, foster or stepchildren) and/or grandchildren and is subject to your estate being worth less than £2,000,000. If your estate is worth more than £2,000,000, then the RNRB is subject to a taper reduction for £1 for every £2 over the £2,000,000 threshold.
What happens to my available inheritance tax allowances if they are not used on my death?
If your IHT allowance is not used on your death, for example, because you left your entire estate to your spouse or civil partner (so your estate did not attract IHT) or where your estate was worth less than £325,000, then the Executor(s) or Personal Representative(s) in your surviving spouse or civil partner’s estate can claim to transfer any unused percentage of the NRB and/or RNRB from your estate to the estate of your spouse or civil partner on their death, boosting the threshold available to their estate before any IHT is due.
How to claim an unused IHT allowance
A formal claim to HMRC must be made to claim any unused percentage and this must be done within 24 months from the end of the month in which the surviving spouse or civil partner has died. This could mean that the surviving spouse or civil partner has up to a maximum of £1,000,000 worth of allowances available to them at the 0% rate, if they have all of their own £325,000 NRB and £175,000 RNRB, as well as their spouse or civil partner’s £325,000 NRB and £175,000 RNRB, available to them. Again, this is subject to any lifetime gifting that is now chargeable on the death in question, which could reduce the allowances available, and is another reason to speak with someone qualified to ensure the best chance of keeping your allowances intact for your estate to benefit from when you pass away.
How the Moore Barlow Private Wealth team can help
If your estate is likely to pay Inheritance Tax on your death, then it is well worth considering now and in good time ways in which you can legally mitigate how much Inheritance Tax your estate will have to pay and ultimately how much of your wealth will be passed to your intended beneficiaries. The best way to do this is to discuss your affairs with an expert in the area so that they can talk through the most appropriate options with you. Please do get in touch with our expert Private Wealth team who would be more than happy to assist.
