SHL Solicitors do not provide financial advice and only offer legal advice. For government information on Inheritance Tax please visit https://www.gov.uk/inheritance-tax
Probably the most hated tax of them all. It applies to everything you’ve ever worked hard for – your savings, property, possessions. All the things you want to leave to your nearest and dearest when you pass away. And unfortunately, more and more families are being faced with an unexpected (and hefty) bill.
According to the latest figures from HM Revenue and Customs (HMRC), in the first quarter of 2022, inheritance tax receipts increased by £300m to £1.8bn – a significant increase compared to the same period last year. It has also been estimated that inheritance tax bills could rise to over £266,000 on average – a 27% increase compared to 3 years ago.
IHT is currently charged on approximately 1 in every 25 estates.
However, property values are rising dramatically. Inflation is at its highest level in 40 years. And the nil rate band (i.e. the threshold for paying IHT) is frozen until at least April 2026. Which means, many more unsuspecting estates are soon likely to fall into the dreaded ‘IHT net’.
The question is, will you be affected? And if so, what can you do about it?
What is the threshold for inheritance tax?
Also known as the nil rate band, the main threshold for inheritance tax – applying to the vast majority of people in the UK – is currently fixed at £325,000.
This means, up to £325,000 of your estate can be passed on without having to pay any IHT.
For anything above this threshold, the standard IHT rate of 40% will apply – but this is only charged to the part of your estate that’s above the threshold. For example, if your estate is worth £425,000 and your tax-free threshold is £325,000, the IHT charged will be 40% of £100,000 (i.e. £40,000).
Avoiding inheritance tax by writing a will
As frustrating as inheritance tax can be, the good news is, there are several legal ways to reduce your bill – or even avoid one altogether. In most cases, it just takes a little forward-planning and contacting a solicitor – such as St Helens Law – to arrange a will.
Writing a will is a key part of inheritance tax planning. Without one, your assets will be distributed according to intestacy rules and may be subject to IHT that could otherwise be avoided. Unfortunately, that means less inheritance for your loved ones and more money for the taxman.
Here are just a few ways in which a will can help to minimise charges.
- Leave your estate to a spouse
If you’re married or in a civil partnership, it’s a good idea to take advantage of the ‘spousal exemption’ and leave your estate to them in your will. In doing so, regardless of the total amount or whether it exceeds the nil rate band – the full value will transfer free from inheritance tax.
When your spouse passes away, they will also benefit from your unused IHT allowance. This means, they can pass up to £650,000 (potentially more) on to somebody else, completely tax-free.
- Maximise your property allowance
By leaving your home to your children (or grandchildren) in your will, you will be entitled to ‘property allowances’. Essentially, these allowances increase your personal nil rate band by £175,000 (correct for the tax year 2022-23) – and you’ll be able to pass on an estate worth up to £500,000 – without paying a single penny of inheritance tax.
For a married couple – who choose to combine their allowance and leave their home to their children – this means passing on an estate of up to £1m free from IHT.
- Leave money for charity
The tax benefits of this option are two-fold.
Firstly, any money that you leave to a UK-registered charity will not count towards the total taxable value of your estate – and can be transferred, 100% free from inheritance tax. This also applies if you leave a gift in your will for a political party or local sports club.
Secondly, if you leave more than 10% of your taxable estate (i.e. the amount above the nil rate band of £325,000), the tax rate applied to the rest of your estate will then fall – from 40% to 36%. This may not seem like a lot, but it can considerably reduce your final tax bill.
Are there any other ways to avoid inheritance tax?
Aside from making a will, there are numerous other legitimate ways to increase the tax-free amount that’s passed on to your heirs. This includes (but may not be limited to):
- spending your money or giving it away as a gift during your lifetime
- taking out a life insurance policy that covers IHT
- opening a trust fund
- releasing equity in your property for you to spend now
- investing in a business that qualifies for business property relief
- maximising your pension allowance
It can also be worth considering a ‘deed of variation’.
This allows your heirs to amend your will after you die – so that, for example, part of the inheritance is re-directed to someone else, and a large tax bill can be avoided.
However, it’s important to bear in mind, this option can be difficult if there are multiple beneficiaries. And as a general rule, it’s better to assess your will regularly – so that your estate is as tax-efficient as possible, and changes do not need to be made after you pass away.
Contact our wills and probate team today
We appreciate that making a will can be a daunting prospect. But if you’re concerned about inheritance tax – and how your estate may be affected by the current economic climate – it may be the best option for you and your family, and our specialist solicitors are always on hand to help.
Whether you’re looking for further legal advice on inheritance tax planning or would like to find out more about our expert will drafting and online will services, please don’t hesitate to get in touch. Simply give us a call on 01744 742360 to chat with a member of the team directly or, if you prefer, send an email to probate@sthelenslaw.co.uk and we’ll respond as soon as possible.