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Inheritance tax: how to calculate it and pass down more assets to your loved ones tax-free

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Almost a third of over-55s have never checked how Inheritance Tax could affect them, according to a new study.

A new study by TIME Investments, a provider of Inheritance Tax services, has found that nearly one in three (31%) over-55s have never checked how Inheritance Tax (IHT) could affect them despite 36% estimating their estates are worth more than the current tax-free allowances.

  • IHT allowance freezes announced in the Budget could raise an additional £985 million by 2025/26
  • More than half (52%) of over-55s do not know what their IHT liability could be
  • 28% of over 5ss say they do not have a will in place

IHT receipts received by HMRC during the tax year 2020/2021 were £5.4 billion, an increase of 4% (£190m) on the tax year 2019/2020, according to Government figures. That said, the recent Budget decision to freeze both the nil-rate and residence nil-rate bands until April 2026 is estimated to raise an additional £985m in the next five years.

However, TIME Investments’ nationwide study shows more than half (52%) of over-55s do not know what their IHT liability could be.  A prudent 25% say they are aware of their potential liability while another 23% are confident they won’t have any IHT to pay.

The research revealed that 36% of over-55s estimate their estate would be worth more than £325,000 – the current nil-rate band – and 20% estimate that the value is worth more than £500,000 which is the current allowance with the residence nil-rate band.

Property wealth is the biggest contributor of the overall estate, the research found. Around 31% of over-55s say their house is worth more than £325,000 compared to 24% of the population as a whole.

TIME Investments

The tax adviser said that was most concerning in the findings was around 28% of over-55s say they don’t even have a will in place.  One of the first steps in IHT planning should be to establish a will to make sure that clients can choose who inherits their assets.

Commenting on the study, Henny Dovland, TIME Investments’ IHT technical specialist said: “Many over-55s will have estates worth more than the current IHT allowances and it is a good first step to check what impact IHT could have.  The Budget freeze on IHT allowances until 2026 will inevitably mean more people are likely to face tax bills and it makes sense to start planning as soon as possible.”

How do I find out my Inheritance Tax exposure?

TIME Investments has created a simple online calculator to forecast a client’s potential future IHT liability. Its calculator factors in the current values and projected growth rates of a client’s property, investments and cash. You can then select the available nil-rate band and residence nil-rate band allowances, which have been updated to reflect the current freeze.

Once your tax adviser has established whether you have an IHT liability, you can choose to show the potential tax savings that a Business Relief investment could offer after just two years.

Business relief

No IHT will be payable on death if the assets were owned by the deceased for at least two years prior to death. This allows the business to continue in the hands of the new owners without any IHT being payable, according to Standard Life.

“Spouses or civil partners of the deceased will inherit the ownership period of their deceased spouse/civil partner. Therefore, if the deceased qualified for business relief, the surviving spouse will immediately qualify in respect of their own estates. Other individuals will need to own the assets personally for two years before they qualify for relief,” according to Standard Life.

Planning point – Assets transferred to a spouse/civil partner are already exempt from IHT due to the spouse exemption. If the estate is to be split between the spouse and the children, for example, it could be more tax-efficient for the spouse to inherit non-business assets with assets that qualify for business relief passing to the children, said the life insurer.

Moving abroad: how will it affect my IHT liabilities?

If you become a non-resident in the UK while you are a contractor, self-employed or in retirement, make sure you are updated on the latest IHT tax liabilities. Inheritance Tax nil rate band and residence nil rate band thresholds from 6 April 2021 – GOV.UK (www.gov.uk)

When someone living outside the UK dies

If your permanent home (‘domicile’) is abroad, Inheritance Tax is only paid on your UK assets, for example property or bank accounts you have in the UK.

It’s not paid on ‘excluded assets’ like:

  • foreign currency accounts with a bank or the Post Office
  • overseas pensions
  • holdings in authorised unit trusts and open-ended investment companies

There are different rules if you have assets in a trust or government gilts, or you’re a member of visiting armed forces.

Contact the Inheritance Tax and probate helpline if you’re not sure whether your assets are excluded.

When you will not count as living abroad

HMRC will treat you as being domiciled in the UK if you either:

  • lived in the UK for 15 of the last 20 years
  • had your permanent home in the UK at any time in the last 3 years of your life

Double-taxation treaties

Your executor might be able to reclaim tax through a double-taxation treaty if Inheritance Tax is charged on the same assets by the UK and the country where you lived.

Have an IHT question?

If you would like to write into The Freelancers’ Couch with an IHT-related question, please email editor@freelanceinformer.com and the editorial team will try to get an expert to answer your question in an upcoming edition.

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