What is Inheritance Tax?
IHT is effectively a tax on your wealth and is payable to Her Majesty’s Revenue & Customs (HMRC) on money or possessions you leave behind when you die.
This can also apply to some gifts you make during your lifetime. Protecting yourself from inheritance tax will allow you to pass on your wealth to future generations
IHT has now become more relevant than ever. The tax liability on even a relatively modest estate can have a dramatic effect, and on a large estate it can be even more damaging.
It is worth noting that Inheritance Tax does not apply to everyone. An estate is only liable once the value is above the current nil-rate band (NRB) which at present is set at £325,000 per individual. So, in this instance where an estate is less than the current NRB, no IHT is liable. For married couples and registered civil partnerships, the threshold for IHT is currently £650,000 (both individual allowances combined) where the full allowance of the deceased partner has been passed to the surviving spouse. Anything in excess of this allowance is taxed at 40%.
IHT mitigation is increasingly becoming a more significant part of good financial planning, as more and more estates fall outside of the nil-rate band and become vulnerable to tax. As average property prices continue to increase, more estate will now be valued over the IHT threshold.
The Residence Nil-Rate Band adds an additional tax-free allowance to the existing £325,000 NRB. For the tax year 2020/21 this sits at £175,000. Following this, it will increase in line with the Consumer Prices Index (CPI). It has also been confirmed that the current NRB of £325,000 will remain frozen until the 2021/22 tax year.
The levels and bases of taxation and reliefs from taxation can change at any time. The value of any tax relief depends on individual circumstances.