Britons are being advised to take note of the often-overlooked Inheritance Tax (IHT) exemptions and allowances available to them when it comes to gifting money, or passing down estates in their Wills.
By being aware of their options, individuals can potentially save a lot of money which may otherwise have incurred IHT.
In the UK, IHT is charged at a rate of 40 per cent of the total value of any estate worth £325,000 or more. This £325,000 tax-free threshold is known as the ‘nil rate band’.
However, individuals can ‘gift’ up to £3,000 each year completely free of IHT – and this amount can be split between any number of people.
On top of this, parents are entitled to give away a gift of up to £5,000 to their children if they are getting married.
Tax-free ‘wedding gifts’ can also be given to grandchildren, or to friends and other relatives – but the amount that can be passed on free of IHT may differ.
Gifts between spouses or civil partners are also tax-free, as are charitable gifts and donations.
Furthermore, individuals who wish to pass property on to their children or grandchildren in their Wills can benefit from an additional tax-free allowance or ‘additional residence nil rate band’ (RNRB) which can enable them to pass down an additional £100,000 in property value before IHT is due.
Better still, this additional allowance will rise over the course of time. Over the next three years, the RNRB will rise to £125,000, £150,000 and £175,000, respectively.
This means that by 2020, each individual will be able to pass on up to £500,000 in property value to their direct lineal descendants completely free of IHT – meaning that couples will effectively be able to pass on up to £1 million.
All of the above can help individuals to reduce their overall IHT bill, but the rules surrounding IHT are complex and confusing and it is always best to seek specialist advice in order to determine how to best benefit.