Which Inheritance Tax exemptions apply to us?
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My wife and I have no children but we have four nieces and nephews whom we’d like to leave our estate to when we die. Our home is worth £400,000 and we have about £500,000 worth of other investments. Can you clarify the rules on Inheritance Tax, please? Some friends have told us we should be able to leave £1 million without there being anything due.
Richard Barker of Smith & Pinching responds:
I’m afraid your friends are wrong, in your case. The combined maximum amount of Inheritance Tax (IHT) exemption that you may be able to claim is £650,000, at current rates. You each have a personal IHT exemption – known as the Nil Rate Band (NRB) – of £325,000 which, if unused, can be passed to the surviving spouse or civil partner. Anything left to each other – so to a spouse or civil partner – is free of IHT, so if the first to die leaves their entire estate to the surviving partner, the survivor’s estate will benefit from both NRBs on his or her death, giving the £650,000 total. It’s important to note that the NRB can’t be passed to a co-habiting partner if the couple are not legally married or in a civil partnership.
The potential £1 million figure your friends quoted only applies if, in addition to the £650,000 of NRBs, you are able to benefit from two Residence Nil Rate Bands (RNRBs). The RNRB has a current maximum value of £175,000, totalling £350,000 for a married couple or civil partners, and is an additional exemption that can be claimed if you are leaving the value of the family home to “direct descendants”. Direct descendants means children, grandchildren, stepchildren and fostered or adopted children. If you don’t have direct descendants, you can’t claim the exemption.
The good news is that you can manage the amount of IHT that will be payable on your estate by planning ahead. There are a number of ways of mitigating a future IHT liability including lifetime giving and the use of certain trusts. You and your wife each have a set of IHT-exempt gift allowances that include an annual allowance of £3,000, as well as allowances for wedding gifts and gifts to charities or political parties.
In addition, you are permitted to make use of the “small gifts” exemption of up to £250 per year to any number of people, provided the total gifts to each person in the tax year don’t exceed £250. Larger gifts may be considered fully outside your estate after seven years.
I suggest you get independent financial advice at this stage to ensure that your estate is as IHT-efficient as possible.
Any opinions expressed in this article do not constitute advice. They assume the 2021/22 tax year and may be subject to change.
For more information, please visit www.smith-pinching.co.uk
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