Estate Planning - FAQs

by Mark Riley, Founder & Managing Partner, MJR Solicitors

What is Inheritance Tax?

Inheritance Tax (IHT) is a tax charge (usually 40%) on any part of your estate that exceeds your personal allowance (also called the nil rate band). This is currently £325,000 per person. The charge drops to 36% if you give at least 10% of your estate away to charity when you die.

What is estate planning?

Estate planning involves planning how to pass on your assets to the next generation in the most effective way. A significant part of this will usually be minimising Inheritance Tax.

How much is the nil rate band?

The nil rate band is your personal allowance that is free from Inheritance Tax. It is currently £325,000 per person. Any unused allowance can be transferred between married couples and civil partners when one spouse dies.

What is the residence nil rate band?

The residence nil rate band is an allowance for passing on the family home. It is currently £175,000 and can be transferred between spouses and civil partners. The allowance is tapered down for people with larger estates, reducing by £1 for every £2 that the estate is valued at over £2 million. The residence nil rate band can only be used when passing on a residence to direct descendants and applies only to your home, not a buy-to-let property.

What is a potentially exempt transfer?

Gifts that are not immediately tax-free are considered potentially exempt. If you die within seven years of making a potentially exempt gift, it counts as part of your estate and may be subject to Inheritance Tax.

What is taper relief?

If you made a potentially exempt gift that was bigger than the nil rate band, you could benefit from taper relief (also known as the seven year rule). This gradually reduces the amount of Inheritance Tax that is chargeable over the seven years after you made the gift.

What are the tax rules and allowances for making gifts?

• The annual gifting allowance is £3,000

• You can make as many small gifts of £250 as you want, but one person can receive no more than £250

• Regular gifts from excess income are taxfree, as long as they won’t affect your normal lifestyle

• Gifts to charities, museums, universities, sports clubs and some political parties are tax-free

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Making or updating your Will is very important, especially in these ever-changing times. Regardless of your age, wealth, health or status, planning for your future can guarantee that your wishes are followed and ensure your loved ones get the full benefit of your legacy. This can be complicated for the uninitiated, but our team of experts will guide you through every step of the process.