Challenge for British High Net Worth Individuals: Do You Succeed in this Inheritance Tax Test?
In the UK, inheritance tax (IHT) is a topic that often leaves people confused, with many harbouring misconceptions about the thresholds and reliefs associated with it. This article aims to shed light on some common misconceptions surrounding IHT.
One common misconception is that IHT only applies to very wealthy individuals. However, every estate should be reviewed since IHT can still apply, even if the deceased "wasn't very wealthy." Another misconception is that all taxes are prepaid during the lifetime of the deceased. It is a misconception that if the deceased was financially responsible, no IHT concerns remain. IHT can only be assessed and settled after death, not prepaid in advance.
Another misconception is that surviving spouses automatically get a double tax-free allowance. While the nil-rate band (NRB) can be transferred between spouses, lifetime gifts or incomplete inheritance to the spouse can reduce this benefit. Additionally, inheriting property means losing eligibility for first-time buyer reliefs and mortgage deals, regardless of whether the inherited property was bought or partially owned.
A less-known relief is the residence nil rate band (RNRB), which increases the threshold by £175,000 each for those who leave their home to direct descendants. This means that, in addition to the main nil-rate band of £325,000 (tax-free threshold), an additional RNRB of £175,000 applies, increasing the threshold.
It is also a misconception that old domicile-based IHT rules for pensions still apply post-2027. Upcoming changes will include pension funds in IHT calculations, applying new residency rules, so relying on outdated assumptions is risky.
Another important aspect to consider is that even if someone is deliberately excluded in a will, they might still have legal grounds to challenge for reasonable financial provision.
Regular reviews of estate planning with professional advice are crucial to avoid unexpected tax liabilities or missed opportunities for relief. Guides, such as the one provided by Charles Stanley, are available to help understand IHT and gifts, explaining what you are allowed to give IHT-free and how to keep a good record.
It is worth noting that the residence nil rate band starts being removed once an estate reaches £2 million, at a rate of £1 for every £2 above the threshold. It vanishes completely by £2.3 million. Chancellor Rachel Reeves announced in the last Budget that these thresholds will be frozen until 2030, which is expected to lead to an increase in the number of families paying inheritance tax in the coming years due to frozen thresholds, high property prices, and pending pension changes.
A recent study showed that out of 3,000 people earning above the £33,000 average annual salary and having at least £1,000 in cash savings, only a quarter aced a six-question test on inheritance tax. This highlights the importance of seeking professional advice and understanding one's estate planning options.
The nil rate band threshold for a single person is £325,000, while for a married or civil partnership couple it is £650,000. This creates a potential maximum joint inheritance tax-free total of £1 million. Anyone who gets a gift from you in those 7 years will have to pay inheritance tax on their gift if more than £325,000 has been given away.
In conclusion, understanding inheritance tax and its associated thresholds and reliefs is crucial for effective estate planning. Seeking professional advice and staying informed can help avoid unexpected tax liabilities and ensure the most effective use of one's estate and finances.
- Proper understanding of inheritance tax (IHT) is essential for effective wealth-management, as many people harbor misconceptions about the thresholds and reliefs associated with it.
- Every estate should be reviewed, as IHT can still apply even if the deceased "wasn't very wealthy."
- It is a misconception that all taxes are prepaid during the lifetime of the deceased; IHT can only be assessed and settled after death.
- Seeking professional advice is important, as a recent study showed that a quarter of people earning above the average salary and having savings didn't grasp inheritance tax fundamentals.
- Regular reviews of estate planning with professional advice are crucial to avoid missed opportunities for reliefs, unexpected tax liabilities, and to navigate the upcoming changes in pension IHT rules.
