What should you know?
If you own your home on a joint tenancy basis and are married, there will be no tax liability on the first death, because anything left to a spouse or registered civil partner, a charity or a community amateur sports club is not subject to IHT. The same applies when you each own half the home as tenants in common and each of you leaves your share in your Will to the surviving spouse. However, a surviving spouse must be UK domiciled for an unlimited amount to be IHT-free, otherwise, a reduced amount is IHT-free.
But IHT could be a problem once the second spouse or registered civil partner dies, in terms for your children. Under the IHT rules for the 2019/20 tax year, once a chargeable estate is worth more than £325,000, the excess becomes subject to IHT at a flat rate of 40%. For example, if your estate is worth £500,000 and your tax-free threshold is £325,000. The Inheritance Tax charged will be 40% of £175,000 (£500,000 minus £325,000).
If an IHT bill looks likely, it is more sensible to make some provision to meet it, otherwise, your heirs may be forced to sell the family home or other assets simply to raise enough money to pay the tax bill. A popular solution is the purchase of a whole-of-life insurance policy written in an appropriate trust and designed to pay out when the surviving spouse dies.
Reliefs relating to Inheritance Tax
Inheritance tax (IHT) is payable by some people who, for the most part, could have avoided it. If you want your estate to go to your loved ones with the minimum amount of IHT payable, you should obtain professional advice. There are currently a number of generous reliefs relating to IHT.
Main residence transferable nil-rate band
Main residence transferable nil-rate band (family home allowance) that applies when the main residence is passed on to a direct descendant. The main residence transferable nil-rate band will work alongside the existing IHT nil-rate band which is currently £325,000. In the same way as with the current nil-rate band, any unused main residence transferable nil-rate band will be transferred to a surviving spouse or registered civil partner.
A property which was never a residence of the deceased, such as a buy-to-let property, will not qualify. The allowance will initially be set at £150,000 in 2019/20 and up to £175,000 in 2020/21 (and then increase each year in line with inflation (CPI)).
Inherited from a spouse
It is possible therefore that by 2020/21, an individual will have their own nil-rate band of £325,000 as well as the main residence transferable nil-rate band of £175,000 in respect of their main residence, plus a nil-rate band of £325,000 inherited from their spouse and the main residence transferable nil-rate band of £175,000 inherited from their spouse.
This gives the much-advertised total of £1 million. It is worth noting that the current nil-rate band of £325,000 is now set to remain until 2020/21. There is also going to be a tapered withdrawal of the main residence transferable nil-rate band for estates worth more than £2 million.
Effect of the proposed changes
Few taxes are quite as emotive – or as politicised – as IHT. The structures into which you transfer your assets can have lasting consequences for you and your family. The rate of IHT payable is 40% on property, money and possessions above the nil-rate band. The rate may be reduced to 36% if 10% or more of the estate is left to charity.
It makes sense to ensure that your affairs are structured in the most tax-efficient way possible. However, it isn’t easy to keep up with the many exemptions and reliefs available. So what should you consider?
Lifetime gifts to individuals are potentially exempt transfers and fall outside the scope of IHT, provided the donor survives at least seven years from the date of the gift.
Trusts can sometimes help you to eliminate unnecessary tax charges, enabling the maximum possible part of your family’s wealth to be preserved. You may like to transfer part of your wealth to a family member but still retain control; our specialists can advise on setting up trusts and can take care of all the administration.
One important way to minimise IHT is to make a Will, so as to leave your family with the maximum assets and at the least tax cost.
Business and corporate structures
If you have a business, it is also important to examine the structure of your business when considering your affairs. Changing the structure of a business can have significant tax implications.
Enjoy special concessions
The treatment for IHT purposes is more favourable for some assets than others. Business assets and shares in unquoted companies, agricultural land and works of art, for example, all benefit from special concessions which may assist in passing wealth from one generation to the next.
Making gifts for charitable purposes can be highly effective in potentially reducing an IHT charge on death.
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