Qualifying for Exemptions
Qualifying for Exemptions
Inheritance Tax (IHT) is the tax that becomes payable on your estate when you die.
However, as with any other tax, there are some exemptions that will reduce or may even remove your own estate from that requirement.
What are you worth? To find out, you need to add together the values of virtually everything you own, including:
The value of your house and any other properties you own (minus any mortgage or equity release debt-liability these may carry)
Savings & investments, including ISA accounts
The value of payouts expected from life assurance policies
Any pictures, wine or other ‘investments’ you have made outside the normal range
Other assets and items of value you own, including your car and jewellery
Some pension funds are exempt from IHT. Please feel free to contact us if you have any questions about what does and does not qualify for exemption – and how you can use pensions as part of the IHT planning process.
Regardless of the value of your estate, you can pass everything over to your spouse or civil partner free of liability. This ensures that they can continue to live in the house and off the income and assets that you have accumulated with them over your time together.
There are two things to be aware of, however:
If you pass on some of your assets to others at this point, they may still have to pay IHT.
This only applies to married couples and civil partners. If you are co-habiting, this allowance will not apply.
You should also be aware that this move does not exempt your estate from IHT completely. It simply defers the calculation on that element of your assets until after your spouse has also died. But more of that below.
For all estates, there is an exemption called the Nil Rate Band (NRB). Currently set at £325,000, there is no IHT liability on this portion of your estate. And if your estate is valued at less than £325,000, no IHT will be payable at all.
Everyone gets their own Nil Rate Band. And if you are married, and do not use that NRB when you die, your spouse/civil partner will be able to inherit that from you – meaning that, in effect, married couples and civil partners have a combined NRB of £650,000.
If you are married or in a civil partnership, therefore, the fact that this NRB can be either used on death or passed on to your spouse on death opens up many options for planning – and potentially reducing the ultimate IHT liability on your beneficiaries.
Rising house prices have meant that for many people, the simple fact of owning a house has taken them into the realms of IHT. And when the house is the only asset that brings along such a liability, children have found themselves forced into selling the family home, at a difficult time, simply to meet the bill.
Since April 2017, therefore, it has also been possible to claim the Residential Nil Rate Band (RNRB) which is currently £175,000.
Again, everyone has their own RNRB if they meet the following criteria:
You own a residential property, ie: your own home
You want to pass htis home to your children or grandchildren (only)
Your total estate, including the property and all other assets, is worth less than £2million
If you are married or in a civil partnership then, as with the NRB above, the RNRB can be passed over to your spouse, increasing the value of that combined RNRB to £300,000.
However, as with all exemptions, there are three things you need to be aware of:
The RNRB is not available to you if you sold your home before April 2015, for example to move into long term care or to live with the children.
If you estate is valued above £2million, then the RNRB will be reduced by £1 for every £2 your estate exceeds that.
If your home is worth less than the RNRB, you can only claim exemption up to the value of your residential property.
In summary, if you’re married and your estate is worth less than the £2m threshold, any unused allowance can be added to your partner’s allowance when you die. This means their threshold can be as much as £1m.
However, if the net value of your estate exceeds £2m, the additional nil rate band will be reduced by £1 for every £2 by which the net value exceeds that amount.
The key to managing the IHT liability for your children is therefore to plan in advance. The rest of the pages in this section are dedicated to the most popular methods of doing so.
The Financial Conduct Authority does not regulate taxation and trust advice.
The information is based on our understanding of current HMRC tax rules applying for tax year 2023/24 which may be subject to future change.
All information on this website is for information purposes only and should not be interpreted as providing individual financial advice. It is important you understand the full benefits and risks of potential decisions as they relate to your individual circumstances and you should seek professional, regulated financial advice before embarking on any course of action.
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