Practical tax tips to guide you through the tax system and help you plan to minimise your liability.
Please use the guide to help you identify planning opportunities, pitfalls to avoid and areas where you may need to take action and then contact us for further advice.
The rules, rates and allowances in this guide relate to the 2024/25 tax year and these may be different for other tax years.
Preserving the inheritance
IHT has some unique features and may be charged on some lifetime gifts, not just on an individual’s death estate. In addition, the threshold for paying IHT (also called the nil rate band) is currently frozen at £325,000 until April 2028 and has been at this level since 2009/10. Therefore, increasingly more estates are falling within the charge to IHT.
Planning to minimise IHT is something that many put off until it is too late and early attention to this tax is almost always worthwhile.
| Practical Tip |
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If you die without a Will, the intestacy provisions will apply and may result in your estate being distributed in a way you would not have chosen. Keep your Will up to date to reflect changes in the family situation. In particular, Wills need to be reviewed and amended as necessary on marriage/civil partnership or on divorce. The precise position depends on whether English or Scottish law applies. |
Key features
- IHT is charged on a person’s estate when they die and on certain gifts made during their lifetime.
- The rate of tax on death is 40% and 20% on lifetime chargeable transfers. The first £325,000 is not chargeable.
- Many lifetime gifts are treated as ‘potentially exempt transfers’ (PETs). So long as the donor lives for at least seven years after making the PET there will be no possibility of an IHT charge whatever the size of the gift.
- There are numerous exemptions and reliefs.
So what’s the problem?
IHT is still a problem because:
- Many are simply not in a position to make substantial lifetime gifts because it will leave them with insufficient capital to live on. As a consequence there is likely to be significant value retained in estates on death.
- Despite the introduction of the residential property nil rate band, which gives some measure of relief, many individuals have a home which will use up the bulk of the nil rate band and any excess remaining assets, such as investments and cash reserves, may be charged to IHT at 40%.
Mitigating the liability
Do not waste your exemptions. Regularly using IHT exemptions will build up funds outside of the estate without incurring an IHT liability.
The main exemptions are:
- an annual allowance of £3,000 per donor per year (can be carried forward for one year only if unused)
- small gifts not exceeding £250 in total per donee per tax year
- gifts made out of surplus income that are typical and habitual
- gifts made in consideration of marriage up to £5,000 if made by a parent, £2,500 by grandparents and £1,000 by others
- gifts to charities, whether made during lifetime or on death
- gifts between spouses and registered civil partners, whether made during lifetime or on death.
Note that spouses/civil partners each have their own exemptions.
Planning in lifetime
If possible you should make absolute gifts in your lifetime. A gift to an individual will be a PET so there will be no liability if you survive seven years. Even if you fail to survive for all of that period there may be a tax saving because the charge which will arise on the PET will be based on the value of the asset when it was originally gifted and not on the value at the date of death. If the value of the gift is below the threshold there will be no charge on the PET but the gift will use up some of the nil rate band (NRB) on death. This means that there may be more tax to pay on the assets still in the estate on death.
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Each spouse/civil partner can take advantage of the NRB. Furthermore, gifts between them are generally exempt. Therefore it pays to use this exemption to broadly equalise estates so that both partners can make full use of exemptions and the NRB. |
Remember that you cannot continue to benefit in any way from the asset gifted because this will render the gift ineffective for IHT purposes. You cannot, for example, give away your home to your children but continue to live in it rent free.
Use available reliefs
Important reliefs of up to 100% are available on business assets such as shares in a family trading company or on agricultural property. It is important that these reliefs are utilised because once the asset concerned is sold the relief will be lost. They can only be used in connection with transfers that are chargeable to IHT.
Consider using trusts
As stated previously, many lifetime gifts are PETs (so may be removed from the charge to IHT entirely). However, the donor ceases to have any control over what the beneficiary does with the gift.
This is where trusts can be useful. Most transfers into trust are immediately chargeable to IHT but if the value of the assets transferred into trust within a seven-year period is below the NRB, there is no charge. Where above the NRB, a lower IHT rate applies to lifetime gifts than the death estate.
The rules are complex but significant tax savings can be achieved with careful planning. Please get in touch if you are interested in making gifts to trusts.
Use the NRB on death
On death, assuming the NRB has not already been utilised in the last seven years, it pays to ensure that it is not wasted. This gave rise to practical problems in that if assets equal to the NRB were bequeathed to children in the Will, the surviving partner may be left short of funds. The rules were therefore altered several years ago to allow the proportion of unused NRB on the death of the first spouse to be transferred to the estate of the surviving spouse. The transferred NRB can only be used against the estate of the second spouse on death.
Use the main residence nil rate band (RNRB)
An additional nil rate band, the RNRB, may be available where a residence is passed on death to direct descendants such as a child or a grandchild. The RNRB is £175,000 in 2024/25 and is frozen until April 2028. The RNRB can only be used in respect of one residential property which has, at some point, been a residence of the deceased.
Any unused RNRB may be transferred to a surviving spouse or civil partner.
The RNRB is also available when a person downsizes or ceases to own a home on or after 8 July 2015 and assets of an equivalent value, up to the value of the RNRB, are passed on death to direct descendants.
There is a tapered withdrawal of the RNRB for estates with a net value (after deducting any liabilities but before reliefs and exemptions) of more than £2 million. The withdrawal rate is £1 for every £2 over this threshold.
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Tom died leaving the whole of his estate of £800,000 to his wife Pru. A few years later Pru died leaving her whole estate of £1,100,000 to her children including the family home worth £600,000. |
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As Tom’s estate was left to Pru, 100% of his NRB and RNRB is available. This is in addition to Pru’s own NRB and RNRB. Therefore IHT on Pru’s death would be calculated on just £100,000 (£1,100,000 – [£325,000 x 2] – [£175,000 x 2]). |
Charitable giving
Legacies to registered charities will reduce the value of the chargeable estate and thus save 40% IHT.
In addition the legacies may result in a lower IHT liability on the estate which remains chargeable. A reduced rate of IHT applies where 10% or more of a deceased’s net estate (after deducting IHT exemptions, reliefs and the nil rate band) is left to charity. In those cases the 40% rate will be reduced to 36%.
Use life assurance
Life assurance arrangements can be used as a means of removing value from an estate and also as a method of funding IHT liabilities. A policy can be arranged to cover IHT due on death. It is particularly useful in providing funds to meet an IHT liability where the assets are not easily realised like family company shares.
For information of users: This material is published for the information of clients. It provides only an overview of the regulations in force at the date of publication, and no action should be taken without consulting the detailed legislation or seeking professional advice. Therefore no responsibility for loss occasioned by any person acting or refraining from action as a result of the material can be accepted by the authors or the firm.
