Charlotte Fleming and Sian Keddie discuss the government’s announcement on Inheritance Tax thresholds and the considerations for those with estates liable for IHT.
In the Spring Budget on 3 March 2021, Chancellor Rishi Sunak announced the UK government’s plans regarding taxes and the economic forecast. Given the financial impact of the Covid-19 pandemic, economic recovery is a priority for the UK government, along with job protection and repayment of debts accumulated by the government during the pandemic.
As far as Inheritance Tax (IHT) is concerned, you may have seen that the Budget has confirmed that the threshold for Inheritance Tax is now frozen at current rates until 2026. In light of this, now might be a good time to consider your estate and any potential IHT liability, if this is not something you’ve previously considered.
What are the current IHT rules?
Inheritance Tax is currently charged at a rate of 40% on the taxable estate. However, at present, every individual is entitled to a Nil Rate Band which is currently £325,000 and is exempt from tax. Therefore, IHT is only charged on the portion of the estate exceeding the Nil Rate Band.
There are also various other IHT exemptions which may be available. For example, assets passing to a surviving spouse or civil partner are free from IHT. Any unused Nil Rate Band can be transferred to the surviving spouse, meaning that a couple who are married or in a civil partnership are entitled to a combined tax-free allowance of up to £650,000.
Every individual is also entitled to a Residence Nil Rate Band (currently worth up to £175,000) for residential property passing to direct descendants on death. However, the right is restricted for estates exceeding £2 million.
At this year’s Budget, it was confirmed that Nil Rate Band will be fixed at £325,000 until 5 April 2026. Additionally, the residence nil rate band will also remain at £175,000.
What other exemptions are available?
There is an annual gift allowance for a total of gifts under £3,000. This can be carried over – in full or in part – to the next tax year only. Gifts worth less than £250 do not contribute towards this total (provided they are not to the same person(s) that you have used the £3,000 allowance on in the same year).
You can give regular gifts out of excess income under a tax-free regime, for example as contribution to the school or university tuition fees of a child or grandchild. However, the rules around the regularity and type of these gifts can be quite complicated. If you wish to give gifts out of excess income to your family, it is advisable to seek legal advice specific to your circumstances to ensure you are following the guidance correctly, and do not risk falling foul of the rules and receiving an unexpected tax bill.
Why this is a good opportunity to consider estate/IHT liability
As the Inheritance Tax threshold has been frozen until April 2026, now is a good time to consider if your estate could be liable for IHT in the event of your death or whether there are any opportunities to carry out some planning. You can do so in the knowledge that you have 5 years before the current framework may change again. You also have some time to arrange future gifts out of excess income or other gifting that may mitigate your tax liability before any potential changes are introduced later down the line that may change your position.
In these uncertain times, it is rare to find such an economic certainty with these thresholds remaining fixed for such a prolonged period, and so this is worth taking advantage of if your estate could be liable for IHT.
If you wish to discuss any matters regarding your estate and potential IHT liability further, please do not hesitate to contact our experienced Wills Estates and Succession Planning Team at BTO who will be able to assist.