Inheritance Tax (IHT) is becoming an increasingly important part of financial planning for many families and business owners across Preston, the Ribble Valley and Lancashire.
Rising property values, pensions, savings and investments can gradually increase the value of an estate over time, potentially creating an unexpected inheritance tax liability.
Understanding how inheritance tax works, including available allowances, gifting rules and potential changes to pension taxation, can help families make more informed long-term financial decisions.
Without careful planning, as much as 40% of an estate above the available thresholds could be lost to inheritance tax, reducing the wealth passed on to future generations.
What are your allowances?
First, it is important to understand what allowances may be available. A common misconception is that a couple simply has £1 million available, but it is helpful to understand how that figure is made up.
Residence Nil Rate Band (RNRB). This allowance applies when a main residence is passed to direct descendants, such as children or grandchildren. It is currently up to £175,000 per individual, or £350,000 for a couple when combined.
The RNRB can only be applied to a qualifying residence, and if the property is worth less than the available allowance, the unused portion cannot usually be applied to other assets, meaning it is effectively lost.
For larger estates exceeding £2 million, the allowance begins to taper away. For every £2 the estate exceeds this threshold, £1 of the RNRB is lost, eventually removing the allowance altogether.
Nil Rate Band (NRB). This is available on death and is currently £325,000 per person. However, this allowance may be reduced by certain lifetime gifts made before death.
Succession of allowances
It is very unlikely that both individuals in a couple will die at the same time. In most cases, on the first death, the entire estate passes to the surviving spouse or civil partner. This transfer is typically exempt from inheritance tax due to the spousal exemption.
Where everything passes to the surviving spouse or civil partner, it is likely none of the deceased’s inheritance tax allowances will have been used on first death. As a result, the unused allowances can be transferred to the survivor and applied on the second death.
This means that on the second death, the estate may benefit from:
- The deceased’s own Nil Rate Band (NRB)
- Any unused percentage of their spouse or civil partner’s NRB
- The Residence Nil Rate Band (RNRB), if applicable
- Any unused percentage of their spouse or civil partner’s RNRB
This can allow a couple to combine their allowances, potentially doubling the amount that can be passed on free of inheritance tax, provided the relevant conditions are met and the allowances are claimed correctly by the executors.
This is where the commonly referenced £1 million figure comes from.
Hidden Traps
I have already touched on one common issue: the loss of the Residence Nil Rate Band (RNRB) where the estate exceeds £2 million. There are also a couple of other pitfalls to be aware of:
- Pensions – From 6 April 2027, most unused pension funds and death benefits are due to be brought within the value of an estate for inheritance tax purposes, subject to the final legislation and guidance in force at that time. For many people, this represents one of the most significant changes to inheritance tax planning in decades and could bring estates above the available allowances.
- Gifts - If you have made lump-sum gifts above your annual £3,000 exemption, these could affect the allowances available on death. If made within the seven years before death, they may use up some or all of your Nil Rate Band (NRB) and, in some cases, may themselves become chargeable. Where trusts are involved, gifts going back up to 14 years may also need to be considered.
- Who you leave your main residence to - If you do not have children, or do not intend to leave your home to children or grandchildren, you are unlikely to benefit from the Residence Nil Rate Band. The same may apply if you leave your main residence to a discretionary trust, even if your children are the beneficiaries.
Your Inheritance Tax Questions, Answered
In summary, I thought it would be useful to answer some of the inheritance tax questions that are most commonly asked by clients across Preston and the Ribble Valley.
What is the inheritance tax threshold in the UK?
The standard Nil Rate Band is currently £325,000 per person. Additional allowances may also apply depending on your circumstances and who assets are left to.
Can married couples reduce inheritance tax?
Assets passed between spouses or civil partners are typically exempt from inheritance tax, and unused allowances may often be transferred to the surviving partner.
What are the inheritance tax gifting rules?
Some gifts may still be considered for inheritance tax purposes if made within seven years before death, particularly where larger sums are involved.
Are pensions subject to inheritance tax?
Under current proposals, many unused pension funds and death benefits may form part of an estate for inheritance tax purposes from April 2027.
Who qualifies for the Residence Nil Rate Band?
The Residence Nil Rate Band generally applies when a main residence is passed to direct descendants, such as children or grandchildren.
Closing thoughts
Inheritance tax can be complex, but our Financial Planners can help you make informed decisions and avoid paying more tax than necessary.
If you would like to discuss your circumstances, you can contact us and our Longridge-based Financial Planners will be happy to have a chat about your current situation.
Risk warning: The value of investments can go down as well as up, so you could get back less than you invested.
This article is based on current legislation and published guidance at the time of writing. In particular, the proposed inheritance tax treatment of pensions from 6 April 2027 remains subject to the legislation and guidance in force at that time.
Two10 Investment Services does not give tax or legal advice but works with clients and their advisers on taxable investments. The Financial Conduct Authority does not regulate tax or legal matters.
