The Autumn 2024 Budget brought inheritance tax (IHT) into the news headlines, but is its impact understood?
Let’s look at an example:
A couple have an estate valued at £1.25 million, including their jointly owned home worth £400,000. Their wills leave everything to the survivor on first death and to their children on second death. What proportion of their estate would disappear in IHT under current rules once that second death occurs?
8%? 20%? 40%? Or 4%?
The correct answer is 8% – let’s explain why.
While the headline rate of IHT is 40%, they would each benefit from:
- A nil rate band of £325,000; plus
- A residence nil rate band of £175,000
Both nil rate bands are fully transferable to the estate of the surviving spouse, to the extent that they remain unused on first death. Therefore, their estate would have £1 million of nil rate bands available at second death, leaving £250,000 to be taxed at 40% – this amounts to £100,000 which is 8% of the estate value of £1.25 million..
The theoretical £1 million of nil rate band has been in existence since April 2020 and is set to remain unchanged until April 2030, following the Autumn 2024 Budget’s two-year extension to an existing threshold freeze. The freeze, which has been in existence for the main nil rate band since April 2009, will continue the process of dragging more estates into IHT as inflation sees the value of property and other assets increase.
The structure of IHT favours married couples and civil partners with children. In the above example, if this was a single person who had never married and died leaving the same £1.25 million estate to his nieces and nephews, the IHT would be nearly 30% of his estate – only one nil rate band and no residence nil rate band, which generally only applies to residential property gifted to children, grandchildren and other specific categories of direct descendants.
At the time of the Autumn 2024 Budget, the Office for Budget Responsibility (OBR) estimated that by 2029/30 nearly 10% of estates will be liable to IHT, up from a little over 5% in 2023/24.
If you are concerned that your family might be affected by IHT, start planning now – time is a crucial element in any IHT mitigation strategy.
The above was provided by Hartey Wealth Management Limited. Registered office: Hilliards Court, Chester Business Park, Chester, CH4 9QP.
Tel: 0808 168 5866. www.harteywm.co.uk
Hartey Wealth Management Ltd is authorised and regulated by the Financial Conduct Authority
Tax treatment varies according to individual circumstances and is subject to change. The Financial Conduct Authority does not regulate tax advice or wills.
