Inheritance Tax Guide (part 1)
Here's our short guide to how Inheritance Tax works.
Roy Jenkins, MP, once said that Inheritance Tax is
"…a voluntary levy paid by those who distrust their heirs more than they dislike the Inland Revenue"
That sounds like the tax is avoidable. So what can you do about it?
The Nil Rate Band for Inheritance Tax - that's the amount of wealth you can leave to the next generation without having to pay the 40% Inheritance Tax - has been stuck at £325,000 for over six years. It is also forecast to stay the same until 2021.
Inheritance Tax affects more and more of us as house values rise and people inherit money. Since 2009, the Inheritance Tax receipts by HMRC have risen steadily from £2.5bn up to almost £4bn by 2015.
Why? Our houses have gone up in value quite a lot, so we are a little richer and the threshold for paying Inheritance Tax has got lower in real terms at the same time. A family with a decent sized family home and a bit of cash needs to think carefully about whether Inheritance Tax will affect you.
Keeping the Nil Rate Band at the same level is making more and more people liable for the tax as their house values and other wealth grows and crosses over the threshold.
There is some good news
If you pass your home to your children, you enjoy an extra £100,000 of Nil Rate Band, so that instead of passing on £325,000 of your family free of Inheritance Tax, you can pass on £425,000.
You can still have that allowance if you sell up in late retirement, with some conditions
You can't have the extra £100,000 Nil Rate Band if you are leaving your home to someone other than your children.
The first spouse of a couple to die can transfer your unused Nil Rate Band to the survivor, so you can transfer the £325,000 and the £100,000 extra Nil Rate Band for the passing on the family home. This won't help you much if you're single.
If your 'net estate' (that means your assets minus liabilities) exceeds £2,000,000, then your entitlement to the residence Nil Rate Band gets reduced, by £1 for every £2 of wealth above that level. In practice, this means that estates below £2,000,000 get the full benefit of the residence Nil Rate Band, estates over £2,300,000 lose it entirely, with a scaled benefit in between.
The Residence Nil Rate Band will rise, too. When a residence is passed on death to a direct descendant, the estate qualifies for the Nil Rate Band below as well as the £325,000 Nil Rate Band :
• £100,000 in 2017/2018
• £125,000 in 2018/2019
• £150,000 in 2019/2020
• £175,000 in 2020/2021
If your wealth is above the Nil Rate Band of £325,000, or £425,000 and your health is okay, then there are several options available to you. The options about 'gifts' and 'loans' and 'Business Property Relief' refer to financial wealth such as your savings or investments. They don't work so smoothly with your family home or other property.
The information within this guide if for information purposes only. It is based on our current understanding of HM Revenue & Customs guidelines. Tax and any relief from them are subject to your own individual circumstances which are subject to change.
You should seek independent professional advice before making any financial decisions. The Financial Conduct Authority does not regulate Wills, Trusts or Tax advice.