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Across a complex playing field of asset management, taxation, exemptions and reliefs, without professional guidance, Inheritance Tax (IHT) can cost families thousands of pounds.

Navigating the ins and outs of IHT is challenging, but with some professional support and planning, it is possible to give as much of your hard-earned wealth as possible to your family or other beneficiaries.

IHT is a tax on the transfer of wealth, however it is not normally payable if the transfer is made to a spouse or partner. Inheritance Tax can be paid by the estate of the deceased or during their lifetime.

What is Your Estate? 

Any items of value are considered part of your estate. With shared items, your own proportion will be included in your estate and includes property, bank accounts, gifts made in the previous 7 years and some other investments that you may hold at the time of death.

Potential allowances that you have

The IHT nil-rate band is £325,000 meaning that no tax would be due on the first £325,000 of your estate. Married couples can transfer any unused element to each other giving them £650,000 jointly for the nil-rate band. If your estate is valued above the nil-rate tax band, the surplus will be liable for Inheritance Tax which is currently 40%.

Individuals also have a ‘residence nil-rate band’ which was introduced to reflect property price inflation. The residence nil-rate band is currently £175,000 per person, meaning your overall IHT allowance could increase to £500,000 and you can still transfer unused allowances to your surviving spouse giving couples potentially £1m to pass on with no IHT charge.

Please note that the residence nil-rate band can be lost for estates worth over £2m.

Do Pensions Qualify for IHT?

In most cases, pensions are treated as outside of your estate, meaning that they can be passed on free of Inheritance Tax but this varies depending on pension type.

What is Business Relief? 

Certain types of businesses and investments are eligible for “Business Relief” which means the tax-free passing on of assets. Business relief is available on some business types and investments which the deceased has owned for at least 2 of the 5 years preceding death.

As with many financial matters, Inheritance Tax is a complicated area of financial planning. By working with a Financial Planner, you can seek guidance to potentially reduce your inheritance tax bill thereby increasing the amount of money received by your beneficiaries.

All tax rates, allowances and exemptions accurate at the time of writing – June 2022.

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