Inheritance Tax Avoidance – Devon Wills

Inheritance tax (IHT) is payable upon death or at certain stages during lifetime. For the purposes of this post, we will look at the IHT charge payable upon death which relates to the deceased’s estate. Upon death, the Executors will calculate the value of the estate including the value of any assets i.e., property or monies in bank accounts. They are also required to account for any gifts made within 7 years before the deceased’s death.

If the value of the estate exceeds the Nil Rate Band (NRB) and Residence Nil Rate Band (RNRB), the rate of IHT payable is 40%. The term Nil Rate Band is not a clear one and would be better considered as IHT allowance for clarity.

Allowances

Regarding the NRB and RNRB, each person has a NRB available to them. The current value of the NRB is £325,000, so if the estate exceeds this value, then IHT will become payable unless other allowances are available. However, if the assets’ value fall below the NRB, no IHT will be payable. It is important to be aware that the NRB can be reduced by any gifts and transfers made during lifetime, especially within 7 years prior to death.

The RNRB will only be available when a person leaves a “qualifying residential interest” to direct lineal descendants. For a property to be a qualifying residential interest it must form part of the deceased’s estate at the date of their death and must have been used by the deceased as a residence at some point during their period of ownership. It cannot be applied to a property that was bought as a buy-to-let for example.

“Direct lineal descendants” includes children, grandchildren and so on down the line. It also includes spouses and civil partners of the descendants, stepchildren, adopted children, foster children and children to whom the deceased was the appointed guardian.

The current value of the RNRB is £175,000 which is capped at the value of the qualifying residential interest.

The NRB has remained at £325,000 since the 2009/2010 tax year. However, the value of the RNRB was due to increase in line with inflation based on the Consumer Prices Index, but earlier this year, but it has since been confirmed that both the NRB and RNRB will remain as they are until April 2026.

Steps to Avoid IHT

Gifts to Spouse or Civil Partner

Any gifts made to a spouse or civil partner are free from IHT due to the spousal exemption. This applies in lifetime and in death.

Example:

Paul and Linda are married. In Paul’s Will, he gifts his entire estate to Limnda upon his death. As we know, Paul and Linda each have a NRB and RNRB. As Paul has gifted all to Linda, his NRB and RNRB allowances are unused.  However, as they are married at the time of his death, this means that when Linda dies, her Executors can apply for any of Paul’s unused allowances to be transferred to Linda and applied against her estate. At the current rates, this gives Linda a total allowance of £1,000,000.

*Please note any unused NRB and RNRB is not transferable between unmarried couples*

Small Gifts Exemption

Each person can make IHT free gifts of up to £250 per person during the tax year providing another exemption has not been used by the same person.

Annual Exemption

As well as the above, each person can give away £3,000 worth of gifts each tax year without them being added to the value of the estate.

If the full £3,000 is not used it can be rolled over to the following year so the annual exemption for the following year will be £6,000. It is important to note that any unused annual exemption can only be carried forward for one year.

Wedding or Civil Ceremony Gifts

For gifts under this category to be free from IHT, the gift must be made either before or upon the marriage/civil partnership. It cannot be made after the wedding. The gift must also be made on condition that the marriage or civil partnership occurs.

• A parent can gift up to £5,000 to their own child free of IHT.
• A grandparent can gift up to £2,500 to a grandchild or great-grandchild free of IHT.
• For any other relationship, a person can gift up to £1,000 free of IHT.

Assistance for Living Costs

You can make payments to assist with a relative’s living costs such as an elderly relative or a child under the age of 18 who is in full time education. These payments are free from IHT.

Gifts to Charity

Gifts made to qualifying charities are exempt from IHT.

The rate of IHT can be reduced from 40% to 36% provided 10% or more of the net estate is left to charity.

Gifts to Political Parties

Gifts made to qualifying political parties are free from IHT provided the political party at the last general election had either at least two MP’s that were elected to the House of Commons OR one MP was elected to the House of Commons and the members of the party received at least 150,0000 votes.

For further guidance regarding Inheritance Tax avoidance WITHOUT fear of consultation fees or obligation, please Contact us.