In the realm of estate planning, Inheritance Tax (IHT) stands as a pivotal consideration.
The recent surge in IHT penalties, which amounted to an astonishing £2.28 million in the last tax year, underscores the need for meticulous planning.
Many families are finding themselves unprepared for the intricacies associated with IHT.
Who is responsible for IHT payments?
If you are to avoid penalties, then it is important to understand the responsibilities of those associated with an estate:
Understanding thresholds: The nil-rate band and residence extensions
The standard IHT rate is 40 per cent on estates valued above the nil-rate band, currently £325,000.
However, this threshold could effectively rise to £500,000 if you bequeath your main residence to direct descendants due to the residence nil-rate band.
The significance of lifetime gifts and potentially exempt transfers
Certain gifts you make during your lifetime can fall under Potentially Exempt Transfers (PETs). These become subject to IHT only if you pass away within seven years of making them. Notably, the IHT liability on such gifts reduces yearly after the third year, thanks to taper relief.
Special Cases: Business and Agricultural Relief
Specific business and agricultural assets could be eligible for Business Relief or Agricultural Relief, potentially reducing their IHT valuation by up to 100 per cent.
The Process of Calculating IHT
Calculating IHT is far from straightforward and may involve:
Timeframes and Consequences of Non-compliance
IHT must be paid within six months from the end of the month the deceased passed away. Failing to comply may lead to penalties, interest on unpaid sums, and possibly in-depth investigations, accruing further fines.
The latest figures for the 2022/23 tax year showed a record £5.76 billion in IHT collected, marking a 16 per cent hike from the previous year. The penalties, at £2.28 million, surged by 34 per cent.
These numbers indicate an increasing likelihood of families encountering IHT-related challenges. Thus, it is imperative to tackle these complexities proactively to avert financial repercussions.
Solicitors can play an important role in the management of an estate, including the management of IHT. Often working alongside accountants and tax advisors, our team help families manage and settle estates so that they can enjoy peace of mind. For more information about our private client services, please speak to our team.