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UK Inheritance Tax exemptions

Would your estate be able to utilise any of the UK Inheritance Tax exemptions?

Earlier this year, significant changes were made to the Inheritance Tax (IHT) regulations. These amendments mean that more estates will be considered exempt from IHT, and therefore fewer people will need to file estate returns in order to be granted probate.

The amendments were made to the Inheritance Tax (Delivery of Accounts) (Excepted Estates) (Amendment) Regulations 2021 and are applicable to deaths in the UK from 1st January 2022 onwards.

As can be expected, there are specific criteria an estate needs to meet in order to be considered exempt.

The Nil Rate Band

The nil rate band (NRB) is the threshold that determines whether an estate will be subject to IHT. Currently, the NRB is £325,00, meaning that no one will have to pay tax on the first £325,000 of their estate. If the total value of someone’s estate is below that figure, there will be no IHT to pay.

The Residence Nil Rate Band

The residence nil rate band (RNRB) applies to deaths that happened on or after 6th April 2017. This tax relief could apply to cases where a person passes away, and their estate is above the NRB; it makes it possible for people to not have an IHT bill.

To qualify for the RNRB, a person has to leave their home to their direct descendants (who might be their children, step-children or grandchildren). For the tax year 2021/2022, the RNRB is set to £175,000 for estates under £3 million.

For many, the RNRB helps keep their estate’s total value below the taxable threshold. However, the application process can be complex. We highly recommend that you seek professional advice if you’d like to utilise this exemption.

Lifetime Gifts

IHT exemptions are also available on gifts you make during your lifetime.

Should you gift assets to your spouse or civil partner, there is no IHT to pay as long as they live permanently in the UK. You can also gift to charities or political parties without paying IHT.

There is a yearly allowance for gifting assets free of an IHT charge. You can give away £3,000 worth of money or gifts to one individual or split it between several. There is also a small gift allowance available whereby you can gift up to £250 per person each tax year (provided you haven’t already given them money from another allowance). These small gifts must be made regularly, such as a birthday gift.

Similarly, regular payments that you make to help someone else with their living cost can also be considered exempt from IHT. This is only the case if you can still afford to pay your own usual living cost and if the money is paid from your regular monthly income, so do not tap into your savings, for instance. You might put away savings for children each month or help to pay bills for a child or elderly relative.

Finally, you should be aware of the seven-year rule, which means that no IHT is due on any gift you make, providing you live further a further seven years. If you gifted an isolated amount of money to your child but died within seven years, that money would still be included in your estate for tax purposes. With all of the rules in place, Inheritance Tax planning can get complicated. If you would like professional support in this area, our team is ready and happy to help you.

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