How are death duties calculated?

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Ask the expert at Smith & Pinching about death duties - Credit: Getty Images/iStockphoto

My parents are worried about the amount of death duties that might be due when they die. They have investments worth about £500,000 and their house is currently worth about £400,000. Can you tell me how the bill might be calculated, please?

Phil Beck, Independent Financial Adviser with Smith & Pinching, Chartered Financial Planners

Phil Beck, Independent Financial Adviser with Smith & Pinching, Chartered Financial Planners - Credit: Smith & Pinching

Phil Beck of Smith & Pinching responds:

Inheritance Tax (IHT) is payable on the death of those who have assets above the available Nil Rate Band (NRB is £325,000 per person). The current IHT rate is 40pc of anything over and above this. However, the good news is that the vast majority of estates won’t pay IHT because of the extensive exemptions available.

First, anything left to a spouse or civil partner is free of IHT. On top of that, if you leave your home to your direct descendants (children, grandchildren, including stepchildren and those adopted or fostered), you can claim an additional Nil Rate Band, known as the Residence Nil Rate Band (RNRB). This is up to £175,000 per person, depending on the value of your share of the home.

This gives the individual a potential total Nil Rate Band of up to £500,000. Married couples and civil partners can take advantage of special treatment that allows any unused NRB and RNRB to be passed to the surviving partner, giving the last partner to die a total exemption of up to £1 million if they have been left everything by their partner. It’s important to say that cohabiting couples who are not married or in a civil partnership don’t qualify for this.

The NRB and RNRB are currently frozen until 2026 but may be changed by respective governments after that.

If your parents’ combined estate continues to grow, there may be a future IHT liability. However, this can be managed during their lifetime and on their death using gift exemptions, if appropriate for them. Gift exemptions include the ability for each person to give away a total of up to £3,000 per year, special exemptions for wedding gifts, plus gifts of up to £250 per year to any number of people, provided they’ve not had any other gifts from you during that tax year. Gifts to charities are also exempt, whether made in your lifetime or in your will. Non-exempt gifts are considered completely outside the estate seven years after the gift is made.

It may be useful for your parents to talk to an independent financial adviser to put together a plan to mitigate any IHT that may become due. We use lifetime cashflow planning to project investment growth and increasing house prices at different levels so that they can understand where their combined estate may sit at various points in time.

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Any opinions expressed in this article do not constitute advice.

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