An important part of estate planning is maximising your inheritance tax (IHT) threshold and minimising how much of your estate incurs inheritance tax. There are many elements of a comprehensive IHT saving strategy, but in this post we look at three things you may wish to consider.
Spouse exemption
The inheritance tax threshold is set at £325,000 - known as the ‘nil rate band’ for inheritance tax. However, married couples and civil partners domiciled in the UK can pass on the entirety of their estate to their spouse or civil partner without incurring inheritance tax liability.
There is no limit to the size of an estate that may be passed on tax free to your spouse.
In addition, spouses and civil partners may pass on their ‘unused’ inheritance tax allowance - referred to as ‘transferable nil rate band’. This means that if one spouse does not use any of their allowance, the inheritance tax threshold for the surviving spouse doubles to £650,000.
Leaving your home to descendants
You may also be able to take advantage of the residence nil rate band. To use the residence nil rate band, you must pass on your home to a direct descendant - which may include your spouse. When you pass on your home in this way, the first £175,000 (2021/2022) of the property's value may also be exempt from inheritance tax. How much residence nil rate band you can claim will depend on the value of the property - if it is valued below £175,000, it will be the value of the home that is used.
The additional residence nil rate band can only be used for one residential property per person. If the deceased owned more than one property, it does not matter too much which they pass on - it does not have to be their current main residence; it must simply have been their residence at some point.
You can also transfer unused residence nil rate band to a spouse or civil partner. This means if a married couple owns a home and passes this on to their children, the total potential inheritance tax threshold is £1 million.
Pensions
Pensions are an effective way to pass on wealth to the next generation without incurring an inheritance tax liability. Essentially, pension pots are, for the most part, not subject to inheritance tax. Pensions fall outside of your taxable estate for the purposes of calculating inheritance tax, so when you make contributions to a pension, you are transferring wealth out of your estate without triggering a transfer of value. As a result, in retirement, you may wish to use up as much of your cash assets as possible before dipping into your pension pot to further minimise your inheritance tax liability.
Specialist Estate Planning Lawyers, Edinburgh
Kathryn Johnston is an Associate within Murray Beith Murray Asset Protection group, and is a trust specialist. If this article has raised any questions or you would like to discuss an estate planning matter, then please complete our contact form, or call us on 0131 225 1200.
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