Inheritance Tax - All you need to know
With Inheritance Tax, there are some crucial factors to consider for a comprehensive understanding of the subject. GSB Wealth shall cover everything you need to know about inheritance tax and how to make the most of your hard-earned wealth for generations to come. Starting with the amount of money you intend to leave your loved ones.
Inheritance Tax IHT
When the Inheritance Tax bill was introduced to replace the Capital Transfer Tax, the goal was to boost the government’s revenue. Inheritance planning is a key aspect of financial management, especially when considering the state of your financial affairs for your loved ones after you’re gone. If you want to save your family from a potential inheritance tax bill that could cost a significant amount of your wealth, you should effectively plan your estate in due time.
Contact our team today to arrange a 15-minute call to see how we can help or explore more of our tax planning options.
How rights function under Inheritance
A crucial aspect to consider is the way rights operate in terms of inheritance. When a person dies, certain automatic rights fall on some individuals. For instance, the part of their estate left to a spouse or registered civil partner doesn’t get taxed. Any unused NRB can also be transferred to the surviving spouse or civil partner, potentially doubling the tax-free threshold to £650,000 for the surviving partner. However, unmarried partners do not enjoy the same rights, as parts of the estate left to such a person fall under the Inheritance Tax rules.
Nevertheless, certain steps can be followed to reduce a person’s costs during inheritance. Notably, a spouse will incur tax on any amount exceeding £325,000.
What if the Spouse is Dead?
The nil rate band (NRB) refers to the threshold amount every person can leave in inheritance to a non-exempt beneficiary without incurring inheritance tax. Notably, where a widow or widower is yet to use up their NRB, the percentage can be increased based on the amount unused. However, the executors must make the necessary elections within two years of the death.
Before getting the final amount, certain things must be considered when determining the payable inheritance tax. This includes non-exempt gifts made to the person. Where the total of such gifts within seven years alongside the estate value of the property left for non-exempt beneficiaries is higher than the NRB, then the inheritance tax will be charged at 40%.
Residence Nil Rate Band (RNRB) for 2024/25
For the 2024/25 tax year, the RNRB remains at £175,000. Estates valued above £2 million will see the RNRB taper off by £1 for every £2 above this threshold. Consequently, estates valued at £2.35 million and above will not benefit from the RNRB. When combined with the standard Nil Rate Band (NRB) of £325,000, this allows a potential total tax-free amount of up to £500,000 when a home is passed to direct descendants, such as children or grandchildren.
Taper Relief
Taper relief applies to gifts made within three to seven years before death, potentially reducing the inheritance tax on those gifts. Additionally, the RNRB taper threshold for estates worth over £2 million reduces the available RNRB by £1 for every £2 above this amount.
The Case with Residential Property
There’s an inherited tax charged when someone leaves a residential property they previously occupied to their descendants. Also, any house sold or downsized from July 8, 2015, will also be subject to this tax. It should be noted that this doesn’t operate in the same manner as standard NRB. Instead, its applicability is limited to transfers on death.
Duties of Personal Representatives
One of the most important things here is paying the inheritance tax due on the estate left by the dead. If this has not been done, many other activities, such as paying beneficiaries, cannot be done. The only exception is the property, where the tax can be paid in instalments. Beneficiaries must pay the due taxes on time, as this can be problematic when interest has accumulated.
Taxable Estate
There’s a vast difference between the taxable value and the actual value. As such, when an estate is to be taxed, this will be determined based on the taxable value. For instance, any such item that doesn’t fall under taxable value will be excluded. Furthermore, it’s also noteworthy that where the surviving spouse of the dead needs the unused RNRB, such a person can elect to use it.
The RNRB will also gradually reduce by £1 for every £2, adding to the £2 million threshold. Different provisions are applicable in cases where the person downsized the house.
Lifetime Gifts
When there has been a breach of the threshold, careful consideration must be taken to ensure that the right exemptions are considered. Some reliefs ignored when doing this calculation include business and agricultural reliefs. This means that while the £2 million is based on the value of the assets owned when the person died, lifetime gifts made by the deceased do not count, even if they were made within seven years of death.
What’s Available to Direct Descendants?
The deceased spouse will be entitled to the unused allowance when the property’s value falls below the maximum RNRB. In this case, either the deceased allowance or a registered partner will have the right to receive the transfer of such allowance. The surviving spouse can claim this once the person elects to receive the unused allowance.
Residential Interest
In instances where the deceased has passed on residential interest, close family members must have inherited such property, such as direct descendants, for the property to utilise the Inheritance Tax RNRB. To take effect, however, the death must have occurred on or after April 6, 2017. Also, regarding the residential interest in the question, no requirement exists whether the deceased inherited or owned the property.
Evaluating the Role of Guardians
For clarity, it’s important to state that direct descendants are the people who share direct lineages with the deceased, such as children and grandchildren. This also includes their spouses, registered partners, widows or widowers where applicable.
This term, however, also covers adopted children, stepchildren, and even those whom the deceased played as guardians while alive and when the child was yet to be 18. You should, however, note that relatives such as nephews and nieces do not fall under the category of direct descendants.
Residence Plays a Crucial Role
Irrespective of where the death occurred, the facility’s importance in claiming the RNRB cannot be overemphasised. Before introducing the Inherited Tax rules, those entitled to the deceased property can claim 100% of a deemed RNRB of £175,000. The only exception to this rule is if the estate in question is more than £2 million.
Deed of Variation
It’s possible to claim the unused RNRB from more than a registered civil partner. This, however, cannot exceed 100% of the amount existing. The deed of variation states all the relevant details that pertain to inheritance. For instance, when direct descendants inherit a property left to them by the deceased, it becomes part of their estate.
Does the main residence have an implication?
Whether a property’s location is the deceased’s principal residence is immaterial. Since it can be established that the deceased owns a home at a certain place, the personal representatives can make moves to determine which of the properties should enjoy RNRB. For all calculations necessary, the property’s market value — after considering any liability that might lie against the property — will be the relevant value to use for assessing RNRB.
RNRB and Trust
In some cases, a property may have become the subject of a Trust, or the deceased might have entered an agreement to transfer their home into a Trust once they die. An example of this nature might make it a bit challenging to determine whether RNRB will be available. One crucial consideration here is to assess whether the home belongs to the estate of the deceased and whether direct descendants have a right to inherit the property.
Where an Estate Doesn’t Qualify for Full RNRB
You might face the challenge of not qualifying for the full amount of RNRB, either because the property’s value was previously downsized or due to other factors. In such instances, the property might be entitled to a downsizing addition. However, some conditions must be present here: the deceased must have ceased to own a property as of the 8th of July 2015. The former home of the deceased would have qualified for RNRB if it hadn’t been downsized. Some parts of the home were subject to being inherited by direct descendants.
The downsizing addition seeks to cover the part of the RNRB that appears lost. Nevertheless, personal representatives won’t be able to access this downsizing addition, as the new home carries a higher value than the available RNRB.
Furthermore, the representatives can elect to get the downsizing addition if the deceased had not replaced the downsized home before they died. However, an action for this must be brought no later than two years after the person’s death. Notably, different techniques can be leveraged to address the potential tax liability on an inheritance. The crucial thing to do is ensure that planning techniques are considered when drawing up the financial arrangements for an individual’s estate.
If you would like to learn more about how our Wealth Partners can help you put an all-encompassing plan in place to manage your estate, please contact us today.
At GSB, we explore all the different aspects of your goals, taking everything into account to create a financial plan that works for you throughout life’s events.
FAQs
The Nil Rate Band (NRB) is the threshold amount every person can leave in inheritance without incurring inheritance tax. For the 2024/25 tax year, the NRB remains at £325,000.
The RNRB for 2024/25 is £175,000. Estates valued above £2 million will see the RNRB taper off by £1 for every £2 above this threshold. Estates valued at £2.35 million and above will not benefit from the RNRB.
Taper relief reduces the inheritance tax on gifts made between three and seven years before death. Additionally, the RNRB taper threshold reduces the available RNRB for estates worth over £2 million.
Any unused NRB from a deceased spouse can be transferred to the surviving spouse, potentially doubling the tax-free threshold to £650,000. Planning to utilise the RNRB effectively can also help reduce the tax burden.
The downsizing addition compensates for the RNRB that would have been available had the deceased retained a more valuable property until their death. Conditions include the property being sold or downsized after 8 July 2015 and being inherited by direct descendants.
If you would like to learn more about how our Wealth Partners can help you put an all-encompassing plan in place to manage your estate, please contact us today.
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