In light of the uncertainty surrounding the future of Inheritance Tax, it is essential to familiarise yourself with the existing tax regulations when engaging in estate planning.

Under the current system, Inheritance Tax may be applicable on four occasions:

  1. Upon an individual’s death.
  2. When an individual places assets into specific types of trusts during their lifetime.
  3. When assets are transferred out of specific types of trusts.
  4. At ten-year intervals within certain types of trusts.

Upon an individual’s death, Inheritance Tax is typically levied at a rate of 40% on their total estate, which encompasses the balance of their assets minus any debts and funeral expenses. Each individual is entitled to a tax-free allowance known as their Nil Rate Band, which means that the first £325,000 of their estate is exempt from tax. If they own and reside in a primary residential property and intend to leave it to their direct descendants, they may also be eligible for an additional tax relief of £175,000 known as the Residence Nil Rate Band, provided their estate’s value does not exceed £2 million.

In the case of married couples, they can share their tax allowances upon the death of the second spouse, assuming that the first spouse did not use their entire allowance upon their death. This potential arrangement allows for up to £1,000,000 in tax-free allowances for married couples who own a home and have children.

It may be tempting to regard Inheritance Tax as a tax applicable only to the wealthy, especially considering that figures from the Treasury for the 2020/21 tax year indicate that only 3.73% of estates actually incurred Inheritance Tax. Nevertheless, during that same tax year, nearly 5,000 estates valued between £325,000 and £500,000 paid inheritance tax, accounting for 18% of all estates subject to Inheritance Tax, according to the Institute for Fiscal Studies.

Whether your personal wealth is substantial or more modest, it is advisable to structure your estate planning to align with the existing Inheritance Tax regulations.

Next Steps: Estate planning can be a complex endeavor, especially when there is a potential liability for Inheritance Tax. It is always prudent to seek professional advice to ensure that your intentions regarding the distribution of your estate upon your passing are properly formulated.

If you are considering creating a Will, require assistance with estate planning, or have any questions, please feel free to reach out to the DTM Legal Trusts & Estates Department at Heather Lally or Stephen Mackellar on 01244 354800 or via email at Heather.Lally@dtmlegal.com or Stephen.Mackellar@dtmlegal.com.

This article is not intended to be comprehensive or to provide specific legal advice.  It should not be relied upon in the absence of specific advice given in relation to particular circumstances.