At Blackstone Solicitors, we understand the importance of comprehensive estate planning to ensure your wishes are respected and your loved ones are provided for. One critical aspect of estate planning is understanding inheritance tax (IHT) and how it affects your Will. This article explores the basics of inheritance tax, how it is calculated, and the steps you can take to minimise its impact on your estate.
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What Is Inheritance Tax?
Inheritance tax (IHT) is a tax levied on the estate of a deceased person before their assets are distributed to beneficiaries. The tax is applied to the value of the estate above a certain threshold, known as the nil-rate band. In England and Wales, the current nil-rate band is £325,000 (as of the 2024/2025 tax year). Any part of the estate exceeding this threshold is subject to IHT at a rate of 40%.
How Is Inheritance Tax Calculated?
To determine the amount of inheritance tax owed, the value of the deceased person’s estate must be calculated. This includes:
- Property: The market value of any real estate, such as homes, land, and investment properties.
- Financial Assets: Bank accounts, savings, investments, shares, and pensions.
- Personal Possessions: Valuable items such as jewellery, art, antiques, and vehicles.
- Life Insurance: Policies that are not written in trust may also be included in the estate’s value.
Once the total value of the estate is determined, any debts, funeral expenses, and certain exemptions and reliefs are deducted. The remaining amount, known as the taxable estate, is then subject to IHT.
Exemptions and Reliefs
Several exemptions and reliefs can reduce the amount of inheritance tax owed:
- Spouse and Civil Partner Exemption
Assets left to a spouse or civil partner are exempt from IHT. Additionally, any unused portion of the nil-rate band can be transferred to the surviving spouse or civil partner, effectively doubling the threshold to £650,000.
- Charitable Donations
Gifts to registered charities are exempt from IHT. If you leave 10% or more of your net estate to charity, the IHT rate on the remaining estate is reduced to 36%.
- Business and Agricultural Relief
Certain business assets and agricultural property may qualify for relief, reducing the taxable value of these assets. Business property relief can be up to 100%, depending on the type of business and how long it has been owned.
- Annual Gift Allowance
Each individual can give away up to £3,000 per year without it being subject to IHT. Additionally, small gifts of up to £250 can be made to an unlimited number of people, provided no other gifts are given to the same individuals within the same tax year.
How Inheritance Tax Affects Your Will
Understanding inheritance tax is essential when drafting your Will, as it can significantly impact how your estate is distributed. Here are some key considerations:
- Use of Exemptions and Reliefs
To minimise the impact of IHT on your estate, consider how exemptions and reliefs can be utilised. For example, leaving assets to your spouse or civil partner can help reduce the taxable value of your estate. Additionally, making charitable donations can lower the overall IHT rate.
- Lifetime Gifts
Making gifts during your lifetime can reduce the value of your estate and potentially lower the IHT liability. However, it is important to be aware of the “seven-year rule.” If you survive for seven years after making a gift, it is exempt from IHT. If you die within seven years, the gift may be subject to IHT on a sliding scale known as taper relief.
- Trusts
Setting up trusts can be an effective way to manage your estate and reduce IHT liability. Trusts can provide financial support to beneficiaries while allowing you to retain control over how and when assets are distributed. There are various types of trusts, each with its own tax implications, so it is essential to seek professional advice.
- Reviewing and Updating Your Will
Regularly reviewing and updating your Will ensures it reflects your current wishes and takes into account any changes in tax laws or personal circumstances. For example, if you acquire new assets or experience significant life events such as marriage, divorce, or the birth of children, it is essential to update your Will accordingly.
Steps to Take to Minimise Inheritance Tax
To ensure your estate is distributed according to your wishes and minimise the impact of IHT, consider the following steps:
- Consult a Solicitor
A solicitor specialising in estate planning can provide valuable advice on how to structure your estate to minimise IHT. They can help you identify opportunities for tax-efficient planning and ensure your Will is legally sound.
- Make Use of Lifetime Gifts
Consider making gifts during your lifetime to reduce the value of your estate. Be aware of the seven-year rule and keep detailed records of any gifts made.
- Set Up Trusts
Explore the possibility of setting up trusts to manage your estate and reduce IHT liability. Trusts can offer flexibility and control over how assets are distributed to beneficiaries.
- Review Your Will Regularly
Regularly review and update your Will to ensure it reflects your current wishes and takes into account any changes in tax laws or personal circumstances.
- Consider Charitable Donations
Leaving a portion of your estate to charity can reduce the IHT rate on the remaining estate. Consider incorporating charitable donations into your Will to support causes you care about while reducing your tax liability.
Conclusion
Inheritance tax can have a significant impact on how your estate is distributed, but with careful planning, you can minimise its effects and ensure your wishes are respected. By understanding the basics of IHT, utilising exemptions and reliefs, making lifetime gifts, and setting up trusts, you can create a tax-efficient estate plan. At Blackstone Solicitors, we are here to guide you through the process, offering expert advice and support tailored to your unique circumstances. Contact us today to discuss your estate planning needs and take the first step towards protecting your legacy.
We have a proven track-record of advising upon all aspects of private client work. We will guide you through the process and ensure all checks are carried out swiftly and efficiently and we firmly believe that with the right solicitors by your side, the entire process will seem more manageable and far less daunting.to incorporate, what kind of ownership
How to Contact Our Private Client Solicitors
It is important for you to be well informed about the issues and possible implications of writing a Will. However, expert legal support is crucial in terms of ensuring a positive outcome to your case.
To speak to us today, simply call us on 0345 901 0445, or click here to make a free enquiry. We are well known across the country and can assist wherever you are based. We also have offices based in Cheshire and London.
Disclaimer: This article provides general information only and does not constitute legal advice on any individual circumstances.
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