Posted 12.11.2024
Following the Autumn Budget, the rules on inheritance tax are going to be changing which could have major implications for your financial and estate plan. This now means that inheritance tax planning and specialist estate planning advice is going to be crucial for those who want to pass on as much as they possibly can to their loved ones.
Before we go into the changes that were announced at the Autumn Budget, let us help you understand more about Inheritance Tax and the circumstances where it is payable:
Inheritance tax (IHT) is a tax levied on the value of an estate when someone dies. It is payable by the executors or administrators of the estate. Not everyone is required to pay Inheritance Tax, but if your estate is worth in excess of £325,000 (known as the Nil-Rate Band), then HMRC will expect you to pay inheritance tax at a rate of 40% on the total value of assets in your estate over that amount.
At the Autumn Budget, the government announced that the following will be fixed until 5 April 2030:
John dies, and his estate is worth £700,000.
Subtracting the Nil-Rate Band of £325,000 leaves £375,000.
The taxable estate will be liable for inheritance tax at 40% which would amount to £150,000.
This calculation assumes that there are no other exemptions or reliefs applicable to the estate.
The rules for Inheritance Tax differ depending on whether you are single, married or in a civil partnership.
For a married couple or those in a civil partnership, you can combine your Nil-Rate Band which will amount to £650,000 per couple.
This means that if one partner passes away and their estate does not use up the full £325,000 nil rate band, the unused portion can be transferred to the surviving partner.
As a result, the surviving partner may have an increased inheritance tax threshold, effectively doubling it to £650,000 (assuming no other transfers have been made).
Here’s an example when combining your Nil-Rate Band:
John dies leaving his £700,000 estate to his wife Pam.
Pam now has a combined Nil-Rate Band of £650,000.
£700,000 – £650,000 = £50,000
£50,000 is subject to IHT at the standard rate of 40%:
£50,000 x 40% = £20,000.
Therefore, the inheritance tax due on an estate worth £700,000 held by a married couple or civil partnership in 2023/2024 would be £20,000.
There’s another inheritance tax allowance known as the Residence Nil-Rate Band (RNRB). This is an additional tax-free allowance of £175,000 per person. However, not everyone can utilise the RNRB. It only attaches to a residence passing to direct descendants – details of who qualifies as a direct descendant can be found here: https://www.gov.uk/guidance/inheritance-tax-residence-nil-rate-band#direct-decs [i]
It was introduced in 2015 to acknowledge the increase in intergenerational wealth being created through a rise in property prices in the UK and allows an additional Inheritance Tax allowance of £175,000 per person, or £350,000 for a married couple or civil partnership.
It is transferrable in the same way as the Nil-Rate Band.
When combining the NRB and RNRB, you can effectively take advantage of a combined allowance of £1,000,000 tax-free, reducing the amount of Inheritance Tax payable:
Nil-Rate Band of £325,000 x 2 = £650,000
Residence Nil-Rate Band of £175,000 x 2 £350,000
Total exemption – £1,000,000
To benefit from the combined allowance, certain conditions such as not having previously used the RNRB on another property must be met.
The RNRB is ‘tapered’ at a rate of £1 for every £2 of excess if the overall net value of the death estate exceeds £2 million.
Gifting provides an opportunity to see those close to you enjoy your wealth while you’re still here, while potentially reducing the amount of Inheritance Tax that your loved ones will eventually pay. However, there are rules and potential implications that you need to consider:
Gifts made more than seven years before your death are generally exempt from IHT. These can include significant financial gifts, such as covering university costs or assisting with a home purchase. These are generally treated as Potentially Exempt Transfers (PETs) and are free of IHT after seven years.
An example of the Inheritance Tax seven-year rule:
Tom gives his daughter £50,000 towards starting her own hair dressing business in 2020.
Tom died in 2023 so this gift would be subject to IHT as it was made within the seven-year period. The amount of IHT owed would depend on the overall value of Tom’s estate and the specific circumstances of the gift.
Taper relief exists when you give someone a gift and then die within seven years, the value of that gift may be subject to Inheritance Tax (IHT). However, taper relief can reduce the amount of IHT you owe. The amount of relief depends on how long the donor survived after making the gift and is calculated as follows:
Taper rate can depend on individual circumstances, so it is always recommended to speak with your financial adviser for accurate advice based on your specific circumstances.
What IHT exemptions are available for gifts?
There are a number of exemptions and reliefs available to reduce or eliminate the inheritance tax liability on gifts. These include, but are not limited to:
The gift must be made on or shortly before the marriage or the registration of the civil partnership and be conditional on it taking place.
As from April 2027, unused pension funds and lump sum death benefits payable from registered pension schemes will be potentially liable to inheritance tax. This could add a significant amount of additional IHT liability to estates who fall under the new rules.
HMRC has launched a technical consultation on the processes required to implement these changes for UK-registered pension schemes.
Making a Will
It goes without saying that making a Will* is essential to ensure your wealth is distributed in the way you would like when you die.
Without a will, your assets will be distributed on your behalf, as per Intestacy rules [1] and may be liable to IHT that might otherwise be avoided.
Download our Inheritance Tax Guide
To find out more ways to avoid paying Inheritance Tax, our Inheritance Tax Guide provides 6 ways you can reduce your Inheritance Tax.
DOWNLOAD INHERITANCE TAX GUIDE HERE >>
Everyone’s circumstances are different, and Inheritance Tax is a complicated area. This is why seeking financial advice is important to ensure that you can reduce your potential inheritance tax liability as much as possible.
Book a call with our financial advisers to find out more about how the Autumn Budget changes will affect your Inheritance Tax.
The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief depends on individual circumstances.
* Will writing involves the referral to a service that is separate and distinct to those offered by St. James’s Place. Wills and Trusts are not regulated by the Financial Conduct Authority.
[i] Please note that clicking a link will open the external website in a new window or tab. Links from this post/website exist for information only and we accept no responsibility or liability for the information contained on any such sites. The existence of a link to another website does not imply or express endorsement of its provider, product or services by us or St. James’s Place.
