Inheritance Tax (IHT) planning is a crucial aspect of estate planning that demands careful attention and consideration. Residents of England and Wales should be aware of its implications to ensure their assets are protected and their loved ones are not burdened with unnecessary tax liabilities. In this article, we will explore the fundamental aspects of IHT, shed light on its payable conditions, discuss the likelihood of liability, highlight areas with increased IHT risk, examine average salaries in England and Wales, delve into IHT allowances and exemptions, and emphasise the importance of writing a Will. For comprehensive support and tailored advice, Prestige Legal Services stands ready to assist you.
What is IHT?
Inheritance Tax is a tax on the estate (property, money, and possessions) of a deceased person. It is levied on the total value of the estate above a certain threshold, known as the nil-rate band. The current nil-rate band in England is £325,000. Estates valued below this threshold are not subject to IHT.
When is IHT Payable?
IHT is typically payable when an individual passes away. The tax is usually settled by the executor or administrator of the deceased’s estate and must be paid within six months of the individual passing away. Failure to meet the payment deadline may result in penalties and interest charges.
Percentage of Estates Liable for IHT
It is important to note that not all estates are liable for IHT. In fact, a relatively small percentage of estates in England and Wales are subject to this tax. According to the latest data, approximately 4.2% of all deaths in the 2019-2020 tax year resulted in an IHT liability. Nevertheless, with property values rising and the threshold remaining unchanged, an increasing number of individuals find themselves at risk of IHT.
Areas Where IHT is More Likely
Areas with high property values, such as London and the Southeast of England, tend to have a higher concentration of estates liable for IHT. However, it is crucial to remember that IHT is not solely determined by property value; other assets, such as investments, savings, and personal possessions, also contribute to the overall estate value. Typically house prices can push an estate over the IHT threshold and in many cases, houses need to be sold to fund the bill and mitigation can mean that properties can be protected and kept within the family.
Average Salaries in England and Wales
Understanding average salaries can provide valuable context when considering IHT implications. As of 2021, the average annual salary in England and Wales stood at approximately £31,500. This figure can serve as a helpful benchmark to assess one’s financial circumstances and potential IHT liability. The average salary in London was nearly £42,000. Naturally, those with higher salaries may find that they quickly close in on the nil rate band in terms of estate values.
The average salary of individuals is not directly related to inheritance tax itself, as inheritance tax is not typically based on income. Instead, it focuses on the value of the inherited assets or estates. However, the average salary can indirectly affect the impact of inheritance tax on individuals in a few ways:
- Tax Liability: Inheritance tax is often structured with progressive tax rates, meaning that higher-valued estates are subject to higher tax rates. If a person with a higher average salary inherits a substantial estate, the tax liability associated with that inheritance could be greater due to the progressive tax structure.
- Financial Capability: Individuals with higher average salaries might be better positioned to handle the financial implications of inheritance tax. They may have more resources to pay the tax without significantly impacting their overall financial well-being or having to sell properties to fund bills.
- Planning and Mitigation: Higher-earning individuals often have access to financial advisors or estate planning professionals who can help them mitigate the impact of inheritance tax through various legal strategies. These strategies may include creating trusts, making charitable donations, or utilising other tax-efficient methods to reduce the tax burden on the inherited assets.
IHT Allowances and Exemptions
To mitigate the impact of IHT, there are certain allowances and exemptions that individuals can take advantage of. These include:
- Nil-Rate Band: As mentioned earlier, the current nil-rate band is £325,000. Married couples and civil partners can combine their allowances, meaning their estate can potentially benefit from a £650,000 threshold before IHT is due.
- Residence Nil-Rate Band: This additional allowance, currently set at £175,000, is applicable when a residential property is left to direct descendants (children or grandchildren). It allows for a higher threshold and is subject to specific eligibility criteria.
- Gifts and Exemptions: Certain gifts made during an individual’s lifetime may be exempt from IHT, depending on their nature, value, and timing. Examples include gifts to spouses or civil partners, charitable donations, and regular gifts from income.
Writing a Will
One of the most effective ways to plan for IHT is by writing a Will. By clearly expressing your wishes and making appropriate provisions, you can optimise tax efficiency and ensure your assets are distributed according to your intentions. A well-drafted Will, combined with professional legal advice, can help safeguard your estate and minimise potential IHT liabilities.
Inheritance Tax is a complex area of law that demands careful consideration and planning. With the right support and expert guidance, individuals can navigate this landscape with confidence, protecting their assets and securing the future of their loved ones. Prestige Legal Services is dedicated to providing tailored advice and comprehensive support to help you address your specific IHT concerns. Don’t hesitate to contact us for personalised assistance and peace of mind.