What should you know?
Inheritance Tax is the amount of tax on an estate (which can be property, possessions, money, cars, land, etc) when someone passes away. You will normally not have to pay any Inheritance Tax if the value of the estate is below £325,000 or if you leave everything above the £325,000 to your spouse, partner, charity or community amateur sports clubs.
You must ensure you report Inheritance Tax to HMRC even if the value of the estate is below the £325,000 threshold. If you plan to give your property to either your children or grandchildren, the threshold can increase by £125,000 (bring it up to a total of £450,000) and if you are married/civil partnership and your estate is worth less than your threshold, the unused threshold can then be added to your partner’s threshold when you pass away (meaning their threshold can be up to £900,000).
Inheritance Tax standard rate is 40% and is only charged on the part of the estate that’s higher than that of the threshold. For example, if your estate is worth £600,000 and then you take off your tax- free threshold of £325,000. You Inheritance Tax will be charged at 40% of the remaining amount (600,000 minus 325,000) of £275,000.
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
Since 6 April 2017, there has been a new main residence transferable nil-rate band (family home allowance) that applies when the main residence is passed on to a direct descendant. This new 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 £100,000 in 2017/18, increasing to £125,000 in 2018/19, £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 a 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 a 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.
The guidance and/or advice contained within this website is subject to the UK regulatory regime, and is therefore targeted at consumers based in the UK.
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