Inheritance Tax in Northern Ireland: What You Need to Know
Inheritance Tax (IHT) is a subject that many people prefer to avoid, yet it can have a significant financial impact on families across Northern Ireland. With house prices rising and changes to tax laws, more estates are being affected by IHT. Understanding how this tax works and taking proactive steps to minimise its impact can help ensure that your loved ones receive the inheritance you intend for them.
In this guide, we’ll break down the essentials of Inheritance Tax, exemptions and reliefs available, and strategies to reduce your tax liability.
What is Inheritance Tax?
Inheritance Tax is a tax on the estate (property, money, and possessions) of a person who has passed away. In the UK, the standard Inheritance Tax rate is 40%, but it only applies to the value of an estate that exceeds the nil-rate band, which is currently £325,000.
For example, if an estate is worth £500,000, the first £325,000 is tax-free, while the remaining £175,000 is taxed at 40%, resulting in a tax bill of £70,000.
Who Pays Inheritance Tax?
The executor of the estate is responsible for calculating and paying any IHT owed. The tax must be settled before assets are distributed to beneficiaries. However, in cases where the estate includes property or valuable assets, arrangements can be made to pay the tax in instalments over 10 years.
When is Inheritance Tax Paid?
Inheritance Tax must be paid by the end of the sixth month after the person’s death. If not paid on time, HMRC will charge interest on the outstanding amount.
Inheritance Tax Exemptions and Reliefs
There are several exemptions and reliefs that can significantly reduce or eliminate the amount of IHT payable on an estate:
1. Spouse or Civil Partner Exemption
If you leave everything to your spouse or registered civil partner, there is no Inheritance Tax to pay, regardless of the value of the estate. Additionally, any unused portion of the £325,000 nil-rate band can be transferred to the surviving partner, potentially doubling the tax-free threshold to £650,000.
2. Residence Nil-Rate Band (RNRB)
Homeowners can benefit from an additional Residence Nil-Rate Band (RNRB) when passing their primary residence to direct descendants (children or grandchildren). As of 2024, this allowance is £175,000 per person, meaning a married couple could have a combined tax-free threshold of £1 million if they pass on their home to their children.
3. Business and Agricultural Relief
For those who own a business or agricultural land, special reliefs can reduce the value of these assets for IHT purposes:
Business Property Relief (BPR): Can provide 50% or 100% relief on business assets, depending on the type of business.
Agricultural Property Relief (APR): Can provide up to 100% relief on qualifying farmland and buildings.
4. Gifts and Lifetime Transfers
Gifting assets during your lifetime is a common way to reduce the size of your estate and lower IHT liability. However, different rules apply to different types of gifts:
Annual Exemption: You can give away £3,000 per tax year tax-free. If unused, this allowance can be carried forward one year.
Small Gift Exemption: Gifts of up to £250 per person per year are tax-free.
Wedding Gifts: Parents can gift £5,000 to a child tax-free when they marry, while grandparents can gift £2,500.
Potentially Exempt Transfers (PETs): Larger gifts may be free from IHT if the donor survives for seven years after making the gift. Otherwise, the gift may be subject to a tapered tax rate.
How to Reduce Inheritance Tax Liability
While IHT can be a significant financial burden, there are various strategies to reduce its impact:
1. Make Use of Exemptions and Allowances
Taking full advantage of the spouse exemption, RNRB, and gift allowances can significantly lower the taxable value of your estate.
2. Set Up a Trust
Placing assets into a trust can remove them from your estate, reducing IHT liability. Trusts can be used to provide for children, grandchildren, or other beneficiaries while minimising tax exposure.
3. Take Out Life Insurance
A life insurance policy can be arranged to cover an expected IHT bill. However, it must be written in trust to ensure that the payout is not included as part of the taxable estate.
4. Donate to Charity
If you leave 10% or more of your estate to charity, the IHT rate on the rest of your estate is reduced from 40% to 36%. Charitable gifts themselves are always exempt from IHT.
5. Use Business and Agricultural Reliefs
If you own a business or farmland, proper planning can help ensure you benefit from available reliefs, potentially reducing your IHT liability to zero.
Upcoming Changes to Inheritance Tax
The government regularly reviews Inheritance Tax policies, and changes may be introduced that impact the way estates are taxed. In the Autumn Budget 2024, some key changes were announced:
Business and Agricultural Property Reliefs will be capped at a combined value of £1 million. Previously, there was no limit.
Unused pension funds will now be included in estate valuations, meaning they could be subject to IHT (backdated to 6 April 2017).
Tax relief on AIM share portfolios will be reduced from 100% to 50%, making investment strategies less tax-efficient.
Why Estate Planning is More Important Than Ever
Given these changes, it is more important than ever to review your estate plan to ensure your assets are structured in the most tax-efficient way possible. Without careful planning, your loved ones could face unnecessary tax bills, reducing the inheritance they receive.
Final Thoughts
Inheritance Tax can seem complex, but with proper planning and professional advice, it is possible to reduce or eliminate the tax burden on your estate. By taking action early, you can ensure that your wealth is passed on to future generations as intended.
If you would like personalised advice on IHT planning, our expert team is here to help. Get in touch today to discuss your options and ensure your family’s financial future is secure.