In the Autumn Budget, the government made no change to the current inheritance tax (IHT) allowances (nil rate band of £325,000 (NRB) and residential nil rate band (RNRB)of £175,000) which they confirmed would be frozen until the end of the tax year 2030.
In relation to married couples and civil partners, there is no inheritance tax payable on gifts between spouses or civil partners (‘spousal exemption’). This means their combined unused inheritance tax allowances can be used against the estate of the survivor, and any amount above £1million shall be chargeable to inheritance tax at 40%.
Until the budget a popular measure to reduce an individual’s inheritance tax liability was to encourage them to pay into their pension fund. This is because most pension funds are discretionary schemes. So, if the policy holder has nominated beneficiaries to benefit from their pension after their death, the unused pension fund shall be paid to their chosen beneficiaries and not included within their estate when valuing it for IHT purposes. However, from 06 April 2027 this shall no longer be an option and any unused pension funds shall form part of a deceased’s estate when valuing it for IHT purposes. Although, if the unused funds are left to the surviving spouse or civil partner, no IHT shall be payable, due to the spousal exemption.
So, whilst this may not prove to be an issue on the death of the first spouse or civil partner, on the death of the surviving spouse or civil partner their estate may become ‘pregnant’ with these policy proceeds, and as a result a charge to inheritance tax at 40% shall be incurred on the death of the survivor, if it increases their estate above the combined IHT allowances of £1million. Indeed, if the survivor’s estate should exceed £2.35 million there is no RNRB relief allowed, and if the value exceeds £2 million, taper relief is applied, by £1 for every £2 that the deceased’s estate exceeds £2 million. As a result, more estates shall become chargeable to inheritance tax at 40%.
It is more important than ever to make sure your estate can benefit from the Inheritance Tax allowances in full. Please contact the Private Client Team at Rowberry Morris for further advice.