- Inheritance tax (IHT) may apply to your estate when you die. Everyone has a personal tax free allowance (the nil-rate band) of £325,000 as at February 2023. In addition, if you own a home which you will eventually leave to your children or grandchildren, an additional allowance (the residential nil rate band) of up to £175,000 will apply. So if you’re single, own a home and have children, your tax free allowances are likely to total £500,000. Anything over that is taxable at 40%.
- If you’re married, and give everything to your spouse then no IHT is payable on the first death, irrespective of the value of the assets passing to the widow/er, and then when the second of you dies, the allowances are doubled up, so that if a married couple’s assets are less than £1 million, no IHT is payable. Again, everything over that is subject to IHT at 40%. If you only give a part of your estate to your spouse, then the unused part of your nil rate band can be added to their own nil rate band.
- Gifts to charity are completely exempt from IHT. If your estate is liable for IHT and you leave 10% or more of it to charity, then a reduced IHT rate of 36% may be applicable to the rest of your estate. Rules apply to the reduced rate of IHT, and we can advise in detail if necessary.
- The simplest way to limit the IHT payable after you die is to give some assets away during your lifetime. These are called Potentially Exempt Transfers, or PETs. You can give away as much as you like to whomever you like. In order for the gifts to be discounted from your estate, however, a period of 7 years must elapse from the date of the gift before you die. If you died within that 7 year period, some tax would be payable on a sliding scale. Although it’s obviously in your beneficiaries’ interests to pay less IHT on your estate, it’s very important to only make potentially exempt transfers if you’re absolutely sure that you can afford to so without compromising your own lifestyle.
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