The inheritance tax nil-rate band (NRB) has remained at £325,000 since 2009, when the average house price stood at just £159,900. Although the introduction of the main Residence Nil Rate Band (RNRB), which is currently £175,000, has gone someway to mitigating the inheritance tax (IHT) exposure of residential property growth, the fact both allowances are set to remain at existing levels until April 2026 and the average UK property price is now approaching £300,000, means an increasing number of homeowners are seeing their estates being pushed over the IHT threshold.
While both the NRB and RNRB can be transferred between spouses / civil partners if they are not used in whole or in part on the first death, so married couples and civil partners could leave their loved ones a combined estate of up to £1 million without being liable to IHT, the RNRB does have numerous restrictions which mean those who are unmarried, leave no children or grandchildren, or otherwise have estates totalling £2.35m are not entitled to the additional £175,000 allowance.
IHT planning around the family home is difficult and with HMRC forecasting an approximate 40% increase in IHT tax collections between 2022 and 2026, it is important to try and make use of the reliefs, allowances and exemptions that are available, a brief summary of which are below:
- Each person can give away £3,000 a year which is immediately exempt and not on the ‘seven-year clock’. Any unused allowance may be carried forward for one year *
- There is a small annual gifts allowance of £250 which can apply to an unlimited number of recipients *
- Gifts in consideration of marriage can be exempt, the amount dependant on the relationship between the person making the gift and the person getting married *
- Regular gifts out of income is a very useful IHT exemption which allows individuals to make gifts out of income without having to wait seven years or otherwise use up one of the gift allowances mentioned above. There are a number of conditions attached to this, for example, the gift needs to be out of surplus income; the lifestyle of the person making the gift must not be reduced; and there must be a regular pattern of gifts to that individual *
- Certain business property can be gifted / passed on completely free of IHT. Again, there are certain conditions that must be met in relation to the business property in question, period of ownership etc. but this is a very useful relief. A similar relief exists for qualifying agricultural property *
- Pensions can be an efficient way of passing wealth on, as can the use of certain trusts for ongoing income requirements and life policy pay-outs. It may be necessary to engage the services of a financial advisor on financial related products and solutions.
* Gifts not covered by the above exemptions/reliefs that are made to another individual are potentially exempt transfers (known as PETs) and so may subsequently become chargeable to IHT if you die within seven years of the gift. With few exceptions, amounts settled into trust are not potentially exempt, so there is a limit on the value of assets that can be put into a trust before a tax charge arises.
A review of your estate and potential IHT exposure is a good exercise to undertake. This can highlight lifetime planning opportunities and also provide an opportunity to ensure your Will is drafted tax efficiently.
It should be remembered that non-cash gifts will often have capital gains tax consequences and so it is important to seek professional advice to ensure that all possible tax implications of a gift are considered.
For further information please contact Aaron Phillips or Richard Penn to the right of this page.