What happens if I want to protect my assets from IHT?

In the UK, individuals and families who wish to pass on their legacy need to tread very carefully in order to ensure they are not hit with a hefty inheritance tax (IHT) bill.

IHT is levied at a rate of 40 per cent of an estate’s total value on all estates valued at £325,000 or more. This £325,000 threshold is known as the ‘nil-rate band’ and, despite ever-rising wealth across the country, has remained frozen at this amount for several years.

Inheritance tax payments have hit record highs, according to data released by HM Revenue & Customs (HMRC).

Inheritance tax (IHT) receipts grew by £160 million to a total of £5.4 billion in the year to March 2019.

During the next two years increases in the residential nil rate band (RNRB) are expected to reduce IHT receipts. This is because under the RNRB, married couples and people in civil partnerships will have an extra £350,000 of IHT-free allowance per couple, but this will not be fully phased in until the 2020/21 tax year.

Individuals and families who want to explore ways of mitigating their IHT liability should investigate all of their options in order to determine which methods of tax planning will benefit them the most.

One option worth exploring might be the additional residence nil rate band (RNRB). First introduced in April 2017, this is an additional tax-free threshold that families can tap into if they plan on leaving a residential property to their direct lineal descendants in their Wills.

So, if you’re giving away your home to your children or grandchildren, you may qualify for the residence nil-rate band, meaning you’ll gain an additional threshold before IHT becomes due on your estate. This is a further; £150,000 in 2019/20, then £175,000 in 2020/21.

It will then increase in line with the Consumer Price Index (CPI) from 2021/22 onwards.

The amount is added onto the standard nil-rate band; for instance, in 2019/20, your inheritance tax threshold is £475,000 (£325,000 + £150,000), but it will only apply up to the value of your property.

But there are many other beneficial tax savings available. For example, individuals can reduce the rate at which they will incur IHT on the total value of their estate by passing a portion of it to a charity when they die.

By leaving 10 per cent of their estate to a charity, individuals will pay IHT at a rate of just 36 per cent as opposed to 40 per cent, for example.

There are a number of ways in which families and individuals can mitigate their eventual IHT liability and it is always worth seeking tailored advice to determine which methods are most suitable.

For help and advice on matters relating to estate planning and inheritance tax, contact our expert team at AGS Accountants today.