Inheritance Tax (IHT) is a tax levied on the Estate of someone who has died, when the Estate is over a certain value. Any property, possessions or liquid assets can be taxed. Therefore, it is paramount in understanding this tax. It is particularly important if you are planning what will happen to your Estate after you die, or if you are involved as an Executor. That being said, it is likely to be useful in any case, as it is a tax you are likely to encounter firsthand at some point in your life.
IHT is becoming increasingly relevant for people to understand, as the number of people paying IHT is rising. In 2020/21, 4% of Estates were subject to IHT. This number is set to almost double in the coming decade, as a result of the increased wealth in older individuals.
IHT Tax Thresholds 2023/24
The part of your Estate that is exempt from IHT is known as the Nil Rate Band. As of 2023/24, the first £325,000 of your Estate is exempt from IHT. Furthermore, if you own your property, there is an additional exemption on the property of £175,000. This is called the Residence Nil Rate Band, and the values of both the Nil Rate Band and the Residence Nil Rate Band will remain the same until 2025/26. Anything above these values are subject to a 40% tax, and this is the IHT. It must be noted, however, that there are talks ongoing in parliament about reducing or entirely abolishing IHT, however nothing concrete has come of them. It is important, therefore, to stay aware of the development of this situation.
The Transferable Nil Rate Band
Another aspect of the Nil Rate Band to be aware of is the Transferable Nil Rate Band. If you do not use the full £325,000 in exemption, it can be transferred to your surviving spouse. For example, if you use £200,000 of the Nil Rate Band (using current values), the Transferable Nil Rate Band for your spouse would equal £125,000 (at the current values), and so their total exemption when passing on their Estate would be £450,000 (assuming the values haven’t changed). The same applies for the Residence Nil Rate Band, and so there can be considerable exemptions passed onto your surviving spouse should your Estate not meet the requirements to be subject to IHT.
How IHT is Affected by Intestacy
The Intestacy Rules state the way that an Estate will be distributed should someone die without a valid Will. With more than half of adults aged 40 or over having no Will, dying intestate is a reality for many. An intestate Estate is treated the same way an Estate with a Will would be when it comes to IHT – anything above the Nil Rate Band and Residence Nil Rate Band is taxed by 40%. The difference is that there is no control when it comes to the Intestacy Rules, and so you may see your Estate taxed and distributed against what you would have wished for.
If you would like to discuss Estate planning, and how Inheritance Tax and the Nil Rate Band affects you, feel free to get in contact with us for a free 30 minute consultation.
