Once considered a tax on the truly wealthy, Inheritance Tax (IHT) now affects more families than ever before.
It can come as a shock to clients to discover that a significant proportion of your wealth, which includes all of your assets might actually have to be sold in order to meet an IHT liability on death.
With planning and expert guidance, you can add some certainty to your financial future.
Having a will and undertaking IHT planning allows you to have control over who benefits from and how much IHT is paid in the event of your death. It can also allow you to ensure that loved ones are not left with administrative difficulties and having to pay unexpected tax bills.
How does Inheritance Tax work?
- An estate will be subject to Inheritance Tax (IHT) if, on death, it exceeds the individual nil-rate band of £325,000. At its simplest, a 40% tax rate then applies on the amount by which your estate exceeds the nil rate band.
- For an individual’s estate worth £1 million, that means a potential tax bill of £270,000. If no action is taken, only 60% of your taxable estate will be passed to your loved ones – the remainder will go to HM Revenue & Customs (HMRC).
- With the family home often making up a large percentage of an estate, an additional nil-rate band, known as the ‘main residence nil-rate band’ may be available of £175,000.
- The allowance applies to those estates that are 'closely inherited' and contain a 'qualifying residential interest' i.e. if the individual has owned the property and lived in it at some point. Therefore, if you give away your home to your children (including adopted, foster or stepchildren) or grandchildren, your threshold will increase to £500,000 or £1,000,000 for married couples and registered civil partners.
- If your spouse dies before you without fully using their nil-rate band, the proportion of the unused amount can be carried forward to use on your death.
- The rate of IHT and reliefs available can change at any time. Tax relief is dependent on individual circumstances.
How can CavanaghKelly help?
IHT planning focuses on passing as much of your estate as possible to your chosen beneficiaries rather than to HMRC, whilst maintaining flexibility and control over any arrangements that are made.