Unlocking Inheritance Tax: Thresholds, Exemptions & Your Financial Legacy

Unlocking Inheritance Tax: Thresholds, Exemptions & Your Financial Legacy

Inheritance tax, often viewed as a complex and sombre topic, is a subject that individuals and families should be familiar with. Understanding why it’s important is essential for effective financial security and ensuring your assets don’t get a hefty tax bill.  

Let’s take a look and unlock the details you need to make informed decisions… 

What is Inheritance Tax? 

It is simply a tax on the inheritance (money, gifts, assets etc.) received from someone who has passed away. The value of the assets that are subject to inheritance tax is determined by their market value at the time of the deceased’s death. 

Why is it important?

• Financial Planning: Without proper planning and knowledge, you may inadvertently burden your beneficiaries with a large tax bill. Potentially diminishing the wealth you intended to pass on. 
• Compliance: Laws and regulations vary from one country to another. So, it’s important to stay informed of the changes and legislation to avoid any legal issues and penalties. 
• Minimising Tax Liability: Having the most up to date knowledge allows you to make informed decisions and reduce the tax liability on your beneficiaries.

The Thresholds – Top level overview 

• Inheritance Tax Threshold (2023): £325,000 (known as the nil-rate band). 
• Residence Nil Rate Band (RNRB): Provides additional allowances for passing on a home to direct descendants. This amount is set at £175,000 in 2023. 

Let’s delve deeper into the thresholds and legalities specific to the UK 2023/2024: 

• Nil-Rate Band (NRB): The NRB is the portion of the estate that is not subject to inheritance tax. For the tax year 2023/2024, the NRB is set at £325,000. This means that if your estate’s value is below this threshold, there is no inheritance tax to pay. 
• Residence Nil Rate Band (RNRB): The RNRB is an additional allowance introduced in 2017 for passing on a home to direct descendants, such as children or grandchildren. In the 2023/2024 tax year, the RNRB is £175,000. It is important to note that the RNRB is subject to specific conditions, such as the home being left to qualifying beneficiaries. It may be reduced if the estate’s value exceeds certain limits. 
• Transferable Nil Rate Band (TNRB): For married couples and civil partners, any unused portion of the NRB can be transferred to the surviving spouse or partner. This effectively doubles the tax-free allowance for the surviving spouse. 

You can also find out more at Gov.uk.

Legalities and Exemptions 

Now this is where it gets a little complex…. 

• Exempt Beneficiaries: Inheritance tax exemptions are available for certain beneficiaries, including spouses, civil partners, and registered charities. Transfers of assets between these parties are typically exempt from inheritance tax. 
• Gifts and Potentially Exempt Transfers (PETs): Gifts made during an individual’s lifetime can be subject to inheritance tax if they fall within seven years of the donor’s death. These are known as Potentially Exempt Transfers (PETs). The tax payable on PETs decreases with time, and if the donor survives for seven years after making the gift, no tax is due. 
• Business and Agricultural Property Relief: In some cases, business and agricultural assets may qualify for relief from inheritance tax. 
• Permanent Residency: An individual’s residence status can affect their inheritance tax liability. UK individuals are typically subject to UK inheritance tax on their worldwide assets, while non-UK individuals may have different rules apply. 

Gifts

• Annual Gift Allowance: Individuals can make gifts of up to £3,000 each tax year without incurring inheritance tax. This allowance can be carried forward for one year, allowing a total of £6,000 to be given   without tax. 
• Small Gifts Allowance: Small gifts of up to £250 to different people in the same tax year are also exempt. 
• Wedding or Civil Partnership Gifts: There are specific exemptions for gifts made on the occasion of a wedding or civil partnership, with varying amounts depending on the relationship of the donor to the recipient. 

It is essential to seek advice on these exemptions and understand that the laws are subject to change.  

So, if you need support with the most up-to-date information and tailored advice, please contact Nigel.Shaw@langricks.com who will be happy to support you. You can also take a look at some of our tips here.