Tax and Estate Planning Solicitors

The importance of inheritance tax

When you work the majority of your life to provide for your family after you have passed away, inheritance planning is vital to ensure your loved ones reap the maximum benefits of your estate. Professional inheritance planning advice can make sure the right amount of money reaches the intended individuals at the right time and with the least amount lost to inheritance tax. So, why is inheritance tax planning important?

What is inheritance tax planning?

Inheritance tax planning or IHT planning entails the process of finding out your estate’s worth and assessing the ongoing IHT liability. The primary reason for IHT planning is to be able to reduce the impact of inheritance tax, allowing your loved ones to get as much wealth as possible. Prudent IHT planning will help you achieve this and prepare your wealth for loved ones and causes. This will help avoid future generations from being overwhelmed by inheritance.

Understanding tax-fee allowances

Currently, there’s a tax-free allowance referred to as the Nil Rate Band. This allows beneficiaries to inherit a maximum amount of £325,000 without being subject to inheritance tax liability. Any amount beyond this is taxed at 40 per cent.

In addition, you may be able to leverage the Residence Nil Rate Band, which is capped at £175,000. This applies if you leave a property you resided to your loved ones.

Inheritance tax thresholds are frozen until 2026

While the Nil Rate Band has stayed the same for over a decade, the Residence Nil Rate Band tends to increase as inflation goes up. However, following the budget announcement in 2021, the thresholds were frozen up to 2026. This is a huge announcement that can help make your situation better.

Steps to take when Planning for IHT

Planning for inheritance tax can be complicated and that’s why it is best to seek professional advice. They will take you through the process and your available options. These include:

Pooling your allowance with the spouse

Spouses tend to inherit tax-free from their partners. In addition, they can take advantage of the nil-rate allowance. So, if your spouse left the whole estate to you, you can apply both your tax-free allowances when it comes to passing on the estate. If you do this you are able to leave your heirs without incurring tax. However, if your spouse uses a proportion of their Nil Rate Band to leave the estate to others, you’ll only be able to leverage the allowance percentage they didn’t use.

Make a gift to family members

Gifting your assets or money to your loved ones minimises the amount of IHT due on the estate. However, the timing of gifting is crucial and so, you should be careful. If it’s done 7 or more years before you pass on, the receiver won’t have to pay any inheritance tax. However, if it happens within 7 years and you die, the tax may be incurred but it will depend on the gift’s type and value.

Leave money for a charity organisation

In order to encourage charity in the country, any assets donated to a charity organisation do not incur an inheritance tax. In addition, if you leave 10% or more of your estate’s value that goes beyond the nil-rate band to charity, you minimise the inheritance tax due on the remainder to 36% from 40%.

Conclusion

Inheritance Tax is a field that can be complex to many, such that they overlook it. However, effective tax planning and a thought-out written will are imperative if you wish your heirs to receive the maximum amount of your inheritance.