WHAT IS INHERITANCE TAX?

Simply, Inheritance Tax is a tax payable on a person’s assets when they die. Thankfully, not all of it is liable to Inheritiance Tax, as the rate of Inheritance Tax is 40% on chargeable assets.

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Inheritance Tax is not payable on the first part of the value of your estate - the 'nil-rate band'. The nil-rate band is currently £325,000. If the total value of your estate does not exceed the nil-rate band, no IHT is payable. Outstanding debts, such as personal loans or a mortgage and funeral expenses can also be deducted from the value of your estate.

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In April 2017, an additional nil-rate allowance was introduced for main family homes that are passed to direct descendants (children, step children and grandchildren). The allowance started at £100,000 in 2017/18, rising to £125,000 in 2018/19, £150,000 in 2019/20 and £175,000 in 2020/21 (thereafter rising annually by reference to the Consumer Prices Index).

However, this good news is subject to limitations. Where the value of the net estate (not just the property concerned) exceeds £2 million, this additional nil-rate allowance will be tapered away at a rate of £1 for every £2 of value. So, there is no such allowance on estates worth £2.35m or more (or £2.7m on the death of a surviving spouse where the full allowance is available to be transferred).

Additionally, any assets you pass on to your spouse or registered civil partner are exempt from IHT. This exemption does not apply if you were merely living together (i.e. without marrying or registering a civil partnership) and there are different rules if your partner isn’t domiciled in the UK for tax purposes.

The subject of Inheritance Tax is a large and complex one but there are a number of other exemptions, approaches and strategies for organising your affairs to safely and appropriately make sure that you can only pay what is necessary.

Great care needs to be taken however as arrangements that are deemed to be ‘unreasonable’ or ‘abusive’ can be reversed by HMRC with potentially expensive consequences for your estate. There are any number of providers that will suggest or recommend exotic arrangements, schemes or special purpose vehicles, all of which come with big promises of savings and usually large arrangement fees. There are occasions where some of these may be appropriate, but there are also occasions where the arrangements will not only be expensive but will not serve their intended purpose and give rise to unintended tax consequences with little or no recourse.

Simply, there is no substitute for careful and prudent planning within the letter and spirit of the law giving you the peace of mind of knowing your affairs are in order.