Important Inheritance Tax planning tips
Families and individuals are being advised to consider all of the options available to them when it comes to Inheritance Tax (IHT) planning, after recent research found that HM Revenue & Customs (HMRC) collected a record-breaking £5.3 billion in IHT last year.
IHT is incurred at a rate of 40 per cent of an estate’s total value on all estates valued at £325,000 or more. Any estates below the £325,000 or ‘nil rate band’ will not attract IHT.
However, there are a number of ways in which individuals and families can mitigate their IHT liability, or at least increase their ‘zero’ or nil rate band.
One such way is by taking advantage of the new residence nil rate band (RNRB) – an additional tax-free allowance available to most individuals and families who wish to pass on residential property to their direct lineal descendants in their Wills
First introduced last year, the RNRB has been increased by £25,000 as of 6 April 2018 and is now worth £125,000 to individuals and £250,000 to married couples and civil partners, who are able to combine their allowances.
This means that couples who combine their standard £325,000 allowances with the RNRB can effectively pass on an estate valued up to £900,000 to their children, grandchildren, step children or foster children when they die – but it is important that such families consult a solicitor to ensure the appropriate provisions are made.
Another, lesser-known way of reducing IHT liability is to leave behind a charitable legacy.
If a person donates 10 per cent of their wealth to a charity in their Will, their estate will incur IHT at a rate of 36 per cent as opposed to the standard 40 per cent – again making for some significant tax savings.
A report in This Is Money notes that an individual with a £600,000 estate, for example, would be able to leave an additional £8,250 behind for their family by taking advantage of this little-known charity rule.