Inheritance Tax: Estate Planning

Inheritance tax is a complex area but with careful estate planning you can minimise the tax liability payable by your estate on your death.

Each person has a nil rate band of £325,000 on their death which passes tax free via their Will, or alternatively the Intestacy Rules if a valid Will does not exist and anything above this amount will be taxed at 40%, unless your estate successfully qualifies for any additional inheritance tax reliefs.  

For married couples/ civil partners leaving everything to each other, on the first of them to die, all assets passing to the surviving spouse/civil partner will pass inheritance tax free due to the spouse/ civil partner exemption available. On the second to die, the amount to pass tax free is £650,000, as the unused nil rate band from the first to die can be transferred over to the second to die.  The so called transferrable Nil Rate Band.

As of the 6th April 2017, the Residence Nil Rand Band (RNRB) was introduced which gives estates worth up to £2,000,000.00 an additional relief to use against their estate, providing their property has been left to their direct descendants such as a child, grandchild or step-child. The amount of relief available is due to increase each year, with £175,000 being available as of 2020. Currently, the amount available is £125,000. This means that as of 2020, providing the estate meets the qualifying conditions, each individual will be able to leave up to £500,000.00 of their estate inheritance tax free or even up to £1,000,000.00 if estates are left between spouses/civil partners in the first instance.

In addition to the above reliefs, there are several other ways in which you can reduce the tax liability on your estate, for example each individual can gift up to £3,000 per year (known as your ‘annual exemption’) and gifts made over and above this amount 7 years or more before the date of death do not form part of the estate for inheritance tax purposes, providing you have not retained any benefit from the gift such as continuing to live in a property or even visiting a holiday home you have given away. Gifts left to charity can also reduce the tax liability as they are exempt for inheritance tax purposes, and providing the gift to charity equates to 10% or more of the net estate, the rate of Inheritance Tax due on your estate is reduced to 36%.

If you wish to seek further advice on estate planning, please call one of our Private Client team on 01702 338338 (Westcliff Office) or 01277 500123 (Billericay Office) who will be happy to arrange a free half hour consultation.