The Importance of Inheritance Tax Planning and Making a Will

If you intend to leave savings, property or other assets to family or friends after you die, you need to consider inheritance tax (IHT).

It could cost your heirs up to 40% of their inheritance. By planning ahead, you can minimise IHT and ensure as much of your estate as possible reaches your loved ones.

How IHT works: thresholds, rules and allowances

There is a tax-free inheritance allowance, known as the nil-rate band which allows your beneficiaries to inherit up to £325,000 of your estate without incurring tax. On anything above this threshold, the standard 40% inheritance tax rate applies.

If you are leaving property to a family member, the main residence nil-rate band may also apply. This is an additional tax-free allowance that you can use if you pass on a property that you have lived in to your direct descendants, for instance, your child or grandchild. Currently, the main residence nil-rate band stands at £175,000.

Inheritance tax threshold frozen until 2026.

Whilst the nil-rate band has remained the same since 2010/11, the main residence nil-rate band usually rises each year with inflation. It was announced in the 2021 budget that the IHT thresholds would be frozen until 2026. A five-year freeze is significant in IHT planning, and it is recommended to evaluate your situation in light of this announcement.

IHT planning

Most of us want the wealth we have accumulated over our lifetime to be put to good use by those we leave it to. Sadly, when end-of-life financial plans are not put in place, a large portion of assets can be diverted away from the intended recipients. However, with careful preparation, you can ensure as much as possible of your estate reaches your loved ones. As IHT planning can be complex, it is best to seek professional advice.

There are many steps you can take when IHT planning such as applying both your own and your partners tax-free allowances when you pass on your estate, make a gift to loved ones or leave money to charity.

The best way to ensure your estate is inherited by people of your choosing is to make a valid will that is properly drawn up and legally binding.

If you don’t do this, there’s a real possibility that your estate will pass to people you may not have chosen yourself, or as with many siblings, leads to years of family infighting and legal action. Family disputes are becoming increasingly common when people either don’t make a will or leave a badly drawn up document of questionable validity.

Please contact us if you would like more information about the issues raised in this article or any aspect of Wills and Probate.

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