Building a Tax-Effi cient Legacy
Carl Lamb Chartered Financial Planner
www.smith-pinching.co.uk
Inheritance Tax is only payable on a small percentage of estates these days.
Carl Lamb looks at the issues for those people who are affected.
T
he prospect of “death duties” used to be a major concern for those with moderate to large
estates but nowadays Inheritance Tax (IHT) exemptions are widely available so only a small number of people will now leave estates that will have an IHT liability. However, for those with very large estates and those whose circumstances mean they miss out on some of the exemptions available, IHT remains a signifi cant threat to the legacy they can leave to their heirs. For the average family comprising a
couple who are homeowners and have children, there are IHT exemptions that could total £1 million. Every individual has an IHT exemption
– known as the Nil Rate Band – of £325,000.
If a couple are married or civil
partners, any unused Nil Rate Band not used on the death of the fi rst partner is passed to the surviving partner, so if the fi rst partner leaves everything to the second partner, on the second partner’s death the estate has a Nil Rate Band of £650,000.
An additional IHT exemption is
granted if the value of the family home is left to direct descendants – children or grandchildren plus stepchildren and adopted or fostered children. This is known as the Residence Nil Rate Band (RNRB) and can also be passed between couples who are married or in a civil partnership, if unused. The actual exemption will depend on the value of the property involved to a maximum of £175,000 per person (2021/22 tax year), giving a total maximum RNRB for a couple of £350,000. However, the RNRB is reduced on a tapered basis for estates that are worth over £2 million, with estates losing the entire additional
exemption if they are worth over £2.4 million – or £2.7 million (2021/22 tax year) for a couple on the death of the second partner if the fi rst partner’s RNRB has been transferred. Added together, the combined main
Nil Rate Band and Residence Nil Rate Band for a couple would therefore total £1 million, provided the estate is worth less than £2 million. However, if they have no direct descendants, the RNRB cannot be claimed. Unmarried couples not in a civil partnership are treated as individuals
opportunities. These include annual gift allowances, which allow certain gifts an immediate exemption from IHT, including an annual total gift allowance of £3,000. Gifts are normally considered outside
your estate after seven years. Any gifts you make within the last seven years of your life will only be subject to Inheritance Tax (IHT) if the total value of those gifts exceeds your Nil Rate Band. There are other planning measures, including certain trusts and investments, that offer the opportunity to mitigate
Mitigating a future IHT liability is perfectly possible, with the right planning. It’s a good idea to start to plan for this as early as possible so that you can make the most of any available opportunities.
for IHT purposes: the maximum each can leave exempt from IHT is £500,000, provided each leaves the value of their share of their home to their children. If the fi rst partner leaves the value of their home to the second partner, then no RNRB is allowable on the fi rst partner’s estate. Single or divorced/ separated people face the same issues. A single person with no children could potentially own a home that exceeds their NRB of £325,000 without taking account of any savings and investments. Mitigating a future IHT liability is
perfectly possible, with the right planning. It’s a good idea to start to plan for this as early as possible so that you can make the most of any available
IHT if you have a potential future liability. Financial planning can make a huge difference so do get advice to ensure that your heirs can get the maximum benefi t from your estate. Any opinions expressed in this article
are subject to change and are not advice. Any solution described may not be suitable for everyone.
Smith & Pinching are Chartered Financial Planners. If you would like a no-cost exploratory review to discuss your fi nancial planning with an adviser, call us today on 01603 789966 or email
enquiries@smith-pinching.co.uk
for your heirs
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