Inheritance Tax  

Minimising your client's IHT bill

  • Describe some of the rules surrounding IHT
  • Identify some steps to minimise the IHT bill on death
  • Explain how the nil rate bands work
CPD
Approx.30min
Minimising your client's IHT bill
(FT Money)

The recovery from the pandemic and the cost of living crisis has driven more people to take ownership over their finances, with many looking for ways to preserve their wealth.

In the past two years the number of millennials drafting wills has increased by almost 10 per cent, with many citing the Covid-19 pandemic as the reason, a study conducted by LegalZoom and Caring.com revealed. 

While it can be easy to act quickly, thinking longer term should not be overlooked, especially when it comes to making a will, and there are a number of options open to people to ensure they manage their estate efficiently.

The nil rate band

Firstly, it is important to consider the nil rate band). Also known as the inheritance tax threshold, the NRB is the amount at which a person’s estate has no IHT to pay.

Each individual has their own NRB, which is currently capped at £325,000 for 2022-23, and any part of the estate that exceeds this amount is usually chargeable to IHT on death at 40 per cent. However, anything left to a surviving husband or wife is free of tax subject to the satisfaction of certain UK domicile rules.

In calculating the available NRB, people need to take account of any gifts made in the seven years prior to death.

In the case of married couples and members of a civil partnership, the unused proportion of the NRB on the first person’s death can be transferred to the surviving partner so that their NRB increases from £325,000 to include the unused proportion from their late partner. 

The residence nil rate band

Introduced in 2017, the residence nil rate band is an additional amount – currently worth £175,000 per individual – that can be set against the value of a home. It is applied to an estate before the NRB or any NRB that has been transferred to someone through their late partner. Any unused RNRB may also be transferred to a surviving spouse or civil partner.

To qualify, property must pass to direct descendants, so children and grandchildren, but also including foster, adopted or step-children. Care needs to be taken where trusts are included in a will as this can reduce the availability of the RNRB.

The RNRB is also tapered for bigger estates. For every £2 that an estate is valued over £2mn, the RNRB reduces by £1. This means that estates worth more than £2.35mn may not benefit.

The rules are complex, and it is easy to lose the exemption if a will is not drafted correctly. So, it is best to seek specialist advice to ensure you are maximising this allowance.

Discretionary trusts

There are various types of trusts that can be utilised when making a will. Discretionary trusts are particularly popular because they give flexibility.

When choosing this option, an individual may, by their will, leave all or part of their estate to a trust. Trustees are chosen to manage the trust and they can also be beneficiaries if appropriate wording is included.