The most important thing you can do to plan for inheritance tax is to make a will. This is important because it means that your estate will be distributed in alignment with your wishes. If you do not make a will, then your estate will be divided in accordance with the law, which may mean that your loved ones do not receive as much of your estate as you would like.
There is no guarantee that your family will receive a significant portion of your estate if you do not stipulate this in a will. Dying without leaving a will is known as dying ‘intestate. This means that your estate is divided according to the rules of intestacy, and this does not necessarily mean that the entirety of the estate is passed on to your spouse or children.
The rules of intestacy are complex, so if you would like any guidance on the details of these, one of our advisors at Thornton and Baines will be happy to give you some advice over a free Zoom call.
By making a will before you pass away, you can have peace of mind knowing that your estate will be distributed according to your wishes. We recommend that you seek legal advice before starting a will, so that it is valid and secure. One of our advisors at Thornton and Baines will be able to assist you with this.
Having a will also allows your assets to be distributed quickly and easily amongst your beneficiaries. It will also enable you to take full advantage of any Inheritance Tax allowances and reduce a potentially heavy IHT bill.
IHT Allowances:
Nil Rate Band
This is an allowance everyone has. Currently, it is £325,000. If you are married/in a civil partnership and you do not use all your allowance when you die, it will be transferred to your partner or spouse.
For example: if none of this allowance was used by the first person to die, and the entire estate had been passed to the spouse tax-free, when the second person died, they would have a total nil rate band of £650,000, before IHT is charged on the estate.
Nevertheless, this transfer isn’t automatic and needs to be stipulated by the executor of the Will of the second person to die.
The steady increase in property prices in recent years has led to more and more people being caught out by IHT, especially as the current allowance remains ‘frozen’ at £325,000.
As a result of this, in April 2017, the Chancellor introduced a new Allowance called Residence Nil Rate Band.
Residence Nil Rate Band
This, combined with the existing nil rate band, gives a total allowance of £500,000. For a couple, this is worth £1 million.
RNRB is only allocated in the event a person leaves a family home to a direct descendant. This includes a child, an adopted child, step-child or any of their offspring. However, if you would like to leave assets to any other family members, such as parents, siblings, nieces, or nephews, the original nil-rate band can be set against their estate.