The nil-rate band will continue at £325,000, the residence nil-rate band will remain at £175,000. This means a single person maximising the nil rate bands can pass on up to £500,000 with no inheritance tax liability while a married couple or those in a civil partnership can pass on up to £1 million without an inheritance tax liability.
The family home is often the biggest asset in a person's estate and rental property portfolios remain popular, with rising property prices, the freezing of the bands will drag more people into inheritance tax.
The Office for Budget Responsibility has forecast that the freeze on the nil rate bands will result in an increase in IHT receipts for the 2025/26 tax year of £6.6 billion (to put this in perspective receipts for the current tax year 2020/21 are forecast to be £5.2 billion).
Spring Budget 2021 – Inheritance Tax (pruadviser.co.uk) (do we add sources?)
Below, we look below at some of the inheritance tax planning tools we have used recently.
Gifts
Outright gifts to family members is the simplest way to reduce the value of a person's estate. These gifts would then be subject to the 'seven year rule'. This means the gift will only be tax free if the donor lives for seven years, if they die before then then the gift is still included in the calculation of the value of the estate.
However, some people find it difficult to make gifts because they are concerned they may still need the funds in the future or the value of their estate is tied up in illiquid investments such as property.
Insurance
A simple solution to plan for inheritance tax is simply to take out a life insurance policy. Whilst this will not reduce the tax liability itself, it does mean that when the insured dies the insurance pays out a sum to cover the tax due.
Pensions
In most cases a pension remains outside the scope of inheritance tax. Therefore, its value is not included in the calculation of the value of the estate and no inheritance tax is due on the pension. This is a valuable planning tool and we often assess different sources of income to ensure the strategy remains the most tax efficient.
The pension can then be transferred upon death to spouses and the next generation without incurring an inheritance tax liability.
Pensions for grandchildren
We have seen a number of cases where the grandparents wish to give money to their grandchildren but may have concerns about the accessing the money whilst they are still young. A pension is an effective and tax efficient way of gifting money.
It helps the child start saving for their retirement and the benefits of tax free, compound growth gives it a great opportunity to grow over a long period of time. Private pensions cannot be accessed until age attained, currently 55, so grandparents can be assured the child cannot spend the fund.
Tax relief is given on pension contributions so for £80 paid into a pension by the grandparent the pension reclaims tax of £20 topping the pension balance up to £100.
Gifts out of income
Gifts out of surplus income are exempt from inheritance tax, subject to qualifying conditions. So this would help ensure the estate does not continue to grow and the donor does not have to live seven years for the gift to be free of inheritance tax. Gifts made from the capital of the grandparent would still be subject to the seven year rule.
We have seen gifts out of income being used for varying needs, this may be to pay school fees or payments into pensions for the children or grandchildren.
Pensions for grandchildren
We have seen a number of cases where the grandparents wish to give money to their grandchildren but may have concerns about the accessing the money whilst they are still young. A pension is an effective and tax efficient way of gifting money.
It helps the child start saving for their retirement and the benefits of tax free, compound growth gives it a great opportunity to grow over a long period of time. Private pensions cannot be accessed until age attained, currently 55, so grandparents can be assured the child cannot spend the fund.
Tax relief is given on pension contributions so for £80 paid into a pension by the grandparent the pension reclaims tax of £20 topping the pension balance up to £100.
Due to the inheritance tax bans being frozen inheritance tax is expected to be an even bigger issue in the future. If you feel it may affect you or you would like to discuss any of the points raised above, please speak with your normal RNS contact.