My wife and I have just retired and it suddenly seems right to think about what we might leave as an inheritance for our two sons. We are fortunate enough to have built up a considerable investment portfolio that is now worth about £700,000, plus we have our house which is worth about another £400,000. Can you clarify what Inheritance Tax allowances we will qualify for so that we can decide if we need to start giving money away, please?

Wymondham & Attleborough Mercury: Phil Beck is an Independent Financial Adviser Picture: Smith & PinchingPhil Beck is an Independent Financial Adviser Picture: Smith & Pinching (Image: Archant)

Phil Beck of Smith & Pinching responds:

Let me detail what Inheritance Tax (IHT) exemptions might be available to you using the 2020/21 tax year figures. First, anything you leave to your spouse or civil partner is exempt from IHT. It’s important to note that this doesn’t apply to co-habiting partners.

For anything not left to a spouse or civil partner, every individual in the UK has an IHT exemption of £325,000, known as the Nil Rate Band (NRB). On top of that, if you leave the value of the family home to direct descendants (children, grandchildren plus adopted, fostered or step-children), you are entitled to a further IHT exemption of up to £175,000, depending on the value of your share of your home. This is known as the Residence Nil Rate Band or RNRB. The NRB and RNRB are due to go up with inflation each year from April 2021 onwards. It’s important to note that if your estate is worth over £2 million, then the RNRB is subject to a tapered reduction.

The good news is that both the NRB and the RNRB can be passed on to the surviving spouse/civil partner if they’re unused. That means, for example, that if the first of you to die leaves everything to the surviving partner, he or she could have a potential combined exemption of up to £1 million.

However, from your question it would appear that your combined estate is likely to be worth over the combined total NRB and RNRB available to you. Inheritance Tax is levied at 40pc on anything over your exempt amount.

You might benefit from some planning to mitigate your IHT liabilities. There are a number of measures that you might take, including lifetime giving. You each have a set of gift allowances that you can use to reduce your estate, if you so wish. I recommend that you talk to an independent financial adviser to work out a suitable strategy.

It’s worth bearing in mind that gifts to charity are always exempt, so you could also include legacies to charities either during your lifetime or in your wills in your IHT mitigation strategy.

Any opinions expressed in this article do not constitute advice. They assume the 2020/21 tax year and may be subject to change.

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