In the past, Inheritance Tax planning used to be an activity confined to the very rich. However, growing affluence means that this is no longer the case, and with the new threshold limit set to be introduced in April 2017, it’s a great time to take stock of your Inheritance Tax, wills and your estate planning.
What is Inheritance Tax?
Inheritance Tax (IHT) is a tax on the property, money and possessions (estate) of someone who’s passed away.
Inheritance Tax rates
The Inheritance Tax rates are currently 40% on your estate, however the estate can pay Inheritance Tax of 36% on some assets if you leave at least 10% of the estate’s net value to a charity in your will.
The new threshold limit, to be introduced in April 2017, will allow each person to pass on estates valued up to £500,000 tax-free, compared to the currently limit of £325,000.
What happened to George Osborne’s original proposed threshold?
Back in 2015, then Chancellor of the Exchequer George Osborne announced plans to raise the threshold for paying inheritance tax on an estate to £1m.
The new main residence nil-rate band (RNRB) was introduced as an additional nil-rate band, acknowledging when a residence is passed on from death to a direct descendant. This will be:
• £100,000 in 2017 to 2018
• £125,000 in 2018 to 2019
• £150,000 in 2019 to 2020
• £175,000 in 2020 to 2021
After 2021, this will increase in line with the Consumer Prices Index from 2021 to 2022 and onward. For estates valued at more than £2m, there will be a tapered withdrawal of the additional nil-rate band – a rate of £1 for every £2 over the threshold.
When is Inheritance Tax paid?
Inheritance Tax generally has to be settled within six months from the death of the estate owner.
If the tax is not paid within this time, HM Revenue & Customs begin to charge interest. Additional time can be requested to pay the tax if assets such as property take time to sell.
Who is eligible to pay Inheritance Tax?
Anyone can bequeath an estate up to the value of £325,000 without incurring Inheritance Tax. This ‘nil-rate’ band is set by the government and has been frozen until at least 2020/21.
Once the total amount of your estate reaches above £325,000 you’ll be subject to Inheritance Tax. But there are some exceptions and ways to reduce the liability.
Ways to reduce or IHT
You are exempt from Inheritance Tax if you bequeath/leave your entire estate to your spouse/civil partner, a charity or a community amateur sports club. Therefore, if you inherit an entire estate from your spouse, you won’t have to pay Inheritance Tax.
An unused tax-free allowance may also be passed to a spouse. So, for example, a widow can add her deceased husband’s allowance to her own allowance which is also tax-free.
Business Relief and other Inheritance Tax reliefs allow some of your estate’s assets to be passed on without occurring Inheritance Tax, or with a reduction, or the amount due. It’s certainly something to consider.
If you gift your assets and you live for at least 7 years, then all gifts are free of inheritance tax. If you die within 7 years, then a formula is used to calculate the amount of tax due.
If you put your assets into a trust they will now be counted as part of the estate after your death. Placing the assets into a trust fund for your children until they turn 21, for example, is a novel way to get around Inheritance tax.
Inheritance tax planning and advice
Like many things in life, planning is key to obtaining the most favourable outcome for you and your loved ones. As you can gather, there is a lot to consider when thinking about IHT planning. Our experts can simplify this tax planning process for you by harnessing their years of experience, so why not speak to us to how we can help you plan your financial future today.