The Importance of Tax Planning

For Inheritance Tax

It is known that the death of a loved one is a mournful and overwhelming period for friends and family. If your estate is subject to inheritance tax, the last thing you will want is for your family to be stressed or concerned with these payments. These circumstances can however be avoided with careful tax planning measures being taken earlier in life. Depending on the size and value of your estate, it is worth considering enquiring about tax planning and any appropriate measures for your particular estate.

Currently in the UK, the nil rate band (NRB) that each person is entitled to is £325,000. This means that the first £325,000 of your estate will be taxed at 0%, essentially making this amount ‘tax-free’. Subject to any gifts during your lifetime that may become chargeable to tax on the death and subsequently diminish the NRB available on death, you could benefit from £325,000 of your estate being tax free.

Although the NRB was historically not transferable, developments in this area have meant that the NRB of a spouse or civil partner can be transferred to the surviving spouse or civil partner, in effect doubling their NRB. This must be claimed by filling out a form as this transfer doesn’t happen automatically. In order to transfer the NRB, the first spouse will have to have not made any lifetime transfers that have become chargeable and further ensure that it will not be used on their death, for example, by leaving everything to their spouse who is an exempt person for inheritance tax purposes. Therefore, subject to both spouses or civil partners NRB’s being fully intact on the death of the second person, they could benefit from £700,000 of their estate essentially being tax-free.

Another benefit to this is that, if the NRB has increased at the time of the second spouse or civil partners death then both NRB’s will be granted at that increased rate rather than say the £325,000 figure that was in force at the death of the first spouse or civil partner.

The same principles of transfer also apply to the residence nil rate band (RNRB). Each person is entitled to an RNRB worth £175,000 and applies when any property is being closely inherited on death, such as where the deceased has left any property to their children or grandchildren. If the first spouse or civil partner leaves everything to the other spouse or civil partner, then on their death they will be able to benefit from the RNRB of the first spouse, if unused, giving the second spouse a total of £350,000 of an RNRB. With a transferred NRB and RNRB from one spouse or civil partner, and when used in conjunction with the NRB and RNRB of the second spouse or civil partner on their death, the second spouse can benefit from up to £1,000,000 being taxed at 0%.

There are however disadvantages to a spouse or civil partner not utilising their own NRB or RNRB in their own will such as the NRB could decrease in value meaning that less of their estate will be tax free, although this is an unlikely situation as since 1986 the NRB threshold has never decreased in value. There is also a possibility that by not utilising your own NRB and RNRB, a spouse or civil partner could use all of the transferred estate before their death meaning that any ideas or wishes that the first spouse or civil partner had for their estate, such as leaving property or money to children, may not be followed.

Clearly, it is important to consider how best to plan for the inheritance tax implications that may be applicable to your estate. The freeze on the NRB until 2028 as well as increased inflation increasing costs means more estates are likely to become subject to inheritance tax in the future and highlights the importance of tax planning in the near future.