Frozen thresholds combined with exponential cost rises across the UK continue to contribute to a sizeable financial burden which an increasing number of families face. And while there are numerous inheritance tax allowances and exemptions to make the most of, one expert has warned that dated rules can land cohabitating couples in trouble - especially if they aren't proactive with their planning.
Crowe UK private client team partner Richard Bull, said: "Inheritance tax (IHT) in some quarters is the most hated of all taxes despite raising a relatively modest £6.1billion in the whole of 2021-22, compared to the monthly receipts in April 2023 of £70.9billion - a mere drop in the ocean for the UK’s balance of payments."
In consideration, Mr Bull detailed how the UK's IHT regime currently contains numerous 'very generous' exemptions, allowing families to defer and mitigate their tax payable - when wealth passes down the direct bloodline. Yet, Mr Bull, added: "Those in ‘non-traditional’ families could face difficult financial and personal decisions following the death of a loved one," The Express reports.
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He added: "The social changes over the last few decades mean the UK’s Inheritance Tax (IHT) regime largely reflects the values of previous generations, despite recent progress."
At the time of writing, the Spouse Exemption allows married couples and civil partnerships to leave their entire estate to their partner tax free when they die. Inheritance tax is charged on a person's estate should the total sum exceed £325,000 (nil-rate band).
After which, a 40 per cent tax is applied on the remaining figures. Married couples and civil partners can in-turn defer any unused allowance to the second death.
When including the £175,000 residence nil-rate band (£350,000 per married couple), which can shelter the value of a residence, the extra allowance when combined with the regular £325,000 - or £650,000 for married couples - means they can garner a £1million inheritance tax free allowance.
Richard, added: "IHT is more likely to benefit those in marriages or civil partnerships as it hasn’t kept up with the modern phenomenon of people living as common-law partners or those who cohabit with a child or children from a previous relationship. Unless properly advised, this could cause a nasty financial shock for families because they do not have the right piece of paper to receive the appropriate tax relief, and they even may need to sell assets in order to raise funds to pay the potential liability.
"For example. even though a cohabiting partner may have performed the role of parent for many years, unless formally adopted, only the legal parent’s estate will be able to utilise all of the available allowances."
In order to maximise IHT efficiently, and help mitigate any 'financial shocks' it's important to be proactive and seek advice from a financial advisor. A property drafted and regularly reviewed can ensure that assets are distributed in the correct manner.
What is Inheritance Tax?
Inheritance Tax is a tax on the estate (property, money and possessions) of someone who's died. There's usually no Inheritance Tax to pay if either:
- The value of your estate is below the £325,000 threshold you leave everything above the £325,000 threshold to your spouse, civil partner, a charity or a community amateur sports club.
- The standard Inheritance Tax rate is 40%. It's only charged on the part of your estate that's above the threshold.
For example:
Your estate is worth £500,000 and your tax-free threshold is £325,000. The Inheritance Tax charged will be 40% of £175,000 (£500,000 minus £325,000).
Who pays Inheritance Tax?
- Funds from an estate are used to pay Inheritance Tax to HM Revenue and Customs (HMRC). This is done by the person dealing with the estate (called the 'executor', if there's a will).
- Beneficiaries generally don't pay tax on things they inherit. They may have related taxes to pay, for example, if they get rental income from a house left to them in a will.
