IHT can be a contentious topic. A YouGov poll from September 2023 found that 61% of the British public believe the tax to be unfair. The IHT regime is under consultation with the Government where proposals for reform are being discussed. The recent change of Government could mean that there may be some changes to the current IHT regime. While not every estate will have to pay IHT, the impact of IHT can be significant for those that do.
Below are the various allowances, exemptions, and reliefs available that can be utilised to mitigate IHT, as well as steps to take during one’s life to reduce the chargeable value of one’s estate on death.
Available IHT allowances, exemptions and reliefs
Allowances
Each individual has an IHT allowance known as the Nil Rate Band, which for the tax year 24/25 is £325,000 (the “NRB”). No IHT is payable on the value of a person’s estate up to the value of the NRB. So, the 40% IHT is only payable to the extent that a person’s estate exceeds the NRB. The NRB has been frozen until 5 April 2028. This allowance can also be transferred to the estate of your surviving spouse or civil partner if unused on your death.
The Residence Nil Rate Band (the “RNRB”) is currently £175,000 and applies when a person passes their main residence to their direct descendent(s). As with the NRB, this allowance can also be transferred to the estate of your surviving spouse or civil partner if unused on your death.
The result of the above allowances is that for a married couple (or civil partners), with children that inherit the joint estate on the second death, wealth up to £1,000,000 can be exempt from IHT.
Exemptions
- Spousal/Civil Partner Exemption – If you transfer your estate in full to your spouse/civil partner under your Will, then no IHT would be payable. This exemption applies in full in most cases (as it can be limited where there is a domicile mismatch between spouses). This exemption is not available to cohabiting couples.
- Charity Exemption – Gifts to charities are not chargeable to IHT. Further, IHT can apply at a reduced rate of 36% on your estate if you leave at least 10% of the ‘net value’ of your estate to charity under your Will.
Reliefs
- Business Relief – Business relief can be claimed at a rate of either 100% or 50% on various types of business assets that have been owned for at least two years. This relief thereby has the effect of allowing business assets to pass on death free of IHT or with a reduced or nil IHT bill, to assist with business continuity.
- Agricultural Relief – This relief works in a similar manner to Business Relief and may apply to agricultural property, such as farmland. To qualify for the relief, the land must have been owned and occupied for agricultural purposes for two years on death.
Lifetime Gift Allowances
To reduce the size of one’s chargeable estate on death, you may wish to carry out succession planning to provide for your loved ones in your lifetime. There are various gift allowances that can be used to make regular gifts in an IHT efficient manner:
- Annual Exemption – Each individual can give a total of £3,000 worth of cash gifts each tax year without IHT implications. This can be gifted in full to one person, or it can be split between different people. An unused £3,000 from the previous tax year can also be carried over one tax year.
- Small Gift Allowance – You can give up to £250 to any person each tax year, provided that you have not used any other allowance on that same person. You can use this £250 allowance to any number of individuals, for example, on birthdays and religious holidays.
- Gifts for Wedding or Civil Partnerships – Each tax year you can give a tax-free gift to someone getting married or starting a civil partnership. The amounts you can gift depend on your relationship to the person (the closer the relation, the larger the gift allowance). You can gift £5,000 to your child, £2,500 to your grandchild/great-grandchild, and £1,000 to any other person.
- Normal Expenditure Out of Surplus Income Exemption – This exemption requires specific criteria be met but in general,, this exemption applies where you can make payments to another person and there is no limit to how much you can give without IHT implications, provided that you can afford the payments after meeting your usual living costs and you make the payments from your regular monthly income (not capital).
Estate Planning
There are various steps that one can take to facilitate longer term asset protection and mitigate IHT.
- Outright Gifts – You can make outright gifts of capital to individuals to reduce the value of your estate and enable wealth to pass to the next generations in a staggered way. For IHT purposes, any gifts that are made in excess of the allowances listed above will utilise your NRB and may be brought into account on your death for IHT purposes if you die within seven years of making the gift. There is no IHT due on any outright gifts to individuals as long as you live for at least 7 years after giving them. This excludes gifts that are made to a Trust.
- Place Assets into a Trust – As an alternative to outright gifts, assets being placed into a Trust can provide longer term asset protection benefits. If you place assets into a Trust to which you cannot benefit, after seven years the assets transferred will fall outside your estate for IHT purposes. Any growth on the assets can be outside your estate. However, there will be an immediate charge of 20% to the extent that it exceeds the NRB. And, there may be ongoing IHT implications of establishing a Trust that should be carefully considered.
- Taper relief – If IHT did become chargeable on a gift made in one’s lifetime, then taper relief could apply if the gift was made more than three but less than seven years from the date of death, reducing the rate of IHT by 20% by each year that the donor survives.
- Take out a Private Pension or Life Insurance Policy – If you take out a life insurance policy, the policy would be paid out on death to nominated beneficiaries under the terms of the policy and ringfenced from IHT. Private pensions can work in the same manner. Financial advice should always be sought separately on these specific points.
Navigating IHT can be a tricky exercise, and the above list is just a headline of the possible steps that one can take to mitigate their IHT liability on death and is not a complete or exhaustive list. The circumstances in which IHT may be payable vary from case to case, so it is important to be proactive and seek advice from professional advisors.
Seddons’ Private Client department comprises experts in this field who are all STEP qualified, and are well-placed to offer you bespoke advice, tailored to your circumstances.
The information contained in this article is provided for informational purposes only and should not be construed as legal advice on any subject matter. No recipients of content from this article, clients or otherwise, should act or refrain from acting on the basis of any content included in the article without seeking the appropriate legal or other professional advice. The content of this article contains general information and may not reflect current legal developments, verdicts or settlements.