When it comes to passing on assets and estates to loved ones, it’s always a subject that isn’t talked about. I mean, who wants to talk about a loved one passing away! The trouble is, if you have a sizable estate, and plans are not put in place, you heirs could face a tax bill of up to 40% of your estate. Your estate amounts to your property(s), savings and any other assets you hold. One of the tax reliefs in place to help negate the potential IHT to be paid is called the Nil Rate Band. This is currently set at £325,000 (2021-2022) and this allow your heirs to inherit £325,000 before any IHT has to be paid. 

If you are married or in a civil partnership, your partner will always inherit from your estate tax free. On the death of the first partner, the Nil Rate Band can be pooled, thus giving the surviving partner a Nil Rate Band of £650,000. 

If your estate includes a property, you may also benefit from an additional allowance called the Residential Nil Rate Band. As from 2020, this has now reached £175,000, and this allowance can also be pooled on the death of the first partner. This however can only be used on a property that you have lived in, so Buy-to-let properties will not benefit from the Residential Nil Rate Band allowance. The other criteria is that to qualify for the Residential Nil Rate Band, the property has to be left to what the government describe as direct descendants.

This means, that as a couple, you could potentially pass on £1,000,000 before any Inheritance Tax is due. However, some people whose partner died before 21 March 1972 will be caught by a loophole which means they don't get a 'double allowance'. 

There are a number of other ways to avoid or reduce IHT even further, these are;

• Gift allowances.

• Utilising Trusts.

• Gifts to Charity or political parties.

• Lifetime Mortgage.

• Insurance Policies.

Any gifts that are gifted over and above the annual gift allowance are then classed as a Potentially Exempt Transfer (PET). This then falls into a seven year period, and if the person gifting survives seven year from when the gift was originally made, it becomes exempt from IHT. In that seven year period, any IHT due on the gift is then tapered and will reduce after three years from the 40%, by 8% each year, until after the seventh year, when it then becomes fully exempt. 

If you would like to learn more about this subject or require Independent Financial Advice from our local, experienced and friendly team, please feel free to contact us on 01788 57 11 22.

The information provided is based on our current understanding of the relevant legislation and regulations and may be subject to alteration as a result of changes in legislation or practice. All references to taxation are based on our understanding of current taxation law and practice and may be affected by future changes in legislation and the individual circumstances of the investor. 

PJL Financial Services Limited are authorised and regulated by the Financial Conduct Authority. 

Your home may be at risk if you do not keep up repayments or other loans secured against it.