In recent years you may have read the headline that couples with a combined estate of £1 million will not pay IHT on death, and that those with assets worth more than £1 million will only pay IHT on any excess above that figure.
This sounds like great news. However, as with all tax exemptions, there are criteria to meet and pits to fall in, and it is worth reviewing your affairs to make sure you maximise your exemptions.
Is it only couples that can benefit from these exemptions?
Under current legislation, every individual is entitled to a general Nil Rate Band (NRB) of £325,000, and they may also be entitled to a Residence Nil Rate Band (RNRB) of £175,000 subject to various qualifying conditions.
This means an individual could access £500,000 of exemptions, exactly half of the amount available to couples and it is just as important that individuals consider their position.
So, why do the headlines focus on couples?
The real focus here is on married couples or civil partners.
If an unmarried couple can use the exemptions available to each of them at the time they die, they will benefit from £1 million between them. However, the actions required may not suit their particular circumstances.
On the other hand, married couples and civil partners can transfer exemptions unused by the first to die, to be used against the estate of the second. This gives much more flexibility around estate planning.
Will the NRB always be available on death?
The NRB is used up by lifetime gifts made in the seven years leading up to death. If the first to die made gifts of more than £325,000 in that period, there will be no NRB available against their death estate and none to transfer to the survivor if the couple is married or in a civil partnership. Where gifts of less than £325,000 have been made, the NRB will be reduced accordingly.
Will the RNRB always be available on death?
No, and there are various reasons why some or all of it might not be available.
Firstly, the deceased’s estate must contain a property that has been their residence at some point, otherwise no RNRB can be claimed.
Secondly, the deceased must leave the property to a lineal descendant, that is a child or grandchild, or to the descendant’s spouse or civil partner or their widow or widower if they have not remarried. This usually means that the property must be left outright, but there are limited circumstances where property passing through a trust would qualify.
A note of caution. It used to be common practice for married couples to have wills that included a Nil Rate Band Will Trust. Depending on the nature and terms of the trust, the RNRB might be entirely lost, forfeiting up to £140,000 of IHT per couple.
Thirdly, the deceased’s total estate, before reliefs and exemptions, must be less than £2 million for full RNRB to apply.
Finally, the full RNRB is only available if the value of the deceased’s share of the property is the same or higher. For example, if a qualifying residence in an individual’s estate is valued at £150,000, the exemption would be limited to that amount.
What if I no longer own my residence?
Don’t worry, all may not be lost.
There are various provisions which mean that an individual who has sold their main residence or gifted it to a lineal descendant may still be able to obtain the RNRB exemption. Again, the rules are complex, and the exemption can easily be lost.
How can I ensure that I am maximising my IHT exemptions?
We would recommend that you review your will and calculate your current IHT position. We can assist you with this.
Individuals often under-estimate their net worth and can be surprised that they have already breached the exemptions available to them. Carrying out a review allows them to take stock.
A review is also an opportunity to consider how assets will pass and to make any changes. In fact, we would recommend that you review matters at least every five years to ensure that you are comfortable with both your IHT exposure and the legacies under your will.
If you are not happy with the status quo, we can work with your solicitor to update your will in a way that is both tax efficient and meets your current wishes. We can also recommend a suitably qualified solicitor as we work with a number of firms on a regular basis.
It is certainly possible to obtain IHT exemptions on death of £500,000 for individuals and £1 million for couples, but this needs careful planning. Although there is more scope for married couples and civil partners, this does not mean individuals and unmarried couples should not carry out a review. In fact, as they will need to work harder to achieve their goals, it is important that they do so.
If you have any questions about the above or would like to discuss setting a review in motion, please do not hesitate to contact us.