“But in this world nothing can be said to be certain, except death and taxes.”…Benjamin Franklin , Letter to Jean Baptiste Le Roy (1789)
Inheritance Tax ( IHT )
It is ironic that the most punitive of taxes becomes payable after we have died! Inheritance Tax is payable if the value of the deceased’s estate exceeds the Nil Rate Band.
When you die, the Government assesses how much your estate is worth, then deducts your debts from this to give the value of your estate. Your assets include:
- Cash in the bank
- Any property or business you own
- Payouts from life insurance policies
The BIG question… how much tax do you pay?
Your estate will owe tax at 40% on anything above the £325,000 inheritance tax threshold when you die (or 36% if you leave at least 10% to a charity) – excluding the ‘main residence’ allowance (see below).
Dealing with it is one of the biggest single MoneySaving things you can do, as some simple actions can save you £100,000s. Yet sadly many people ignore it, either not wanting to consider the future or simply unable to broach it with relatives for fear of seeming grasping.
IHT to be scrapped on up-to-£1m homes by April 2020
Former Chancellor of the Exchequer George Osborne revealed in July 2015’s Summer Budget that he’d scrap the duty when parents or grandparents pass on a home worth up to £1 million (£500,000 for singles). This is being phased in gradually, reaching a £1m exemption for couples in the tax year 2020/21.
However, the way this works in practice takes some explaining…
The basic allowance is unchanged
The current allowance whereby no inheritance tax is charged is on the first £325,000 (per person) of someone’s estate – which is the value of their total assets they leave behind when they die. Couples can leave a home worth £650,000 without it attracting inheritance tax (singles £325,000). Above the threshold, the charge is 40%. This remains unchanged. What has changed is the introduction of a new ‘main residence’ band.
How does the new ‘main residence’ band work?
New for the 2017/18 tax year was the additional ‘main residence’ allowance. Known as the residence nil rate band, it’s only valid on a main residence and where the recipient of a home is a direct descendant (classed as children, step-children and grandchildren). This is gradually being phased in as follows and is what you’ll get on top of your existing allowance:
- For this tax year (2018/19), it’s starting at £125,000 (meaning a total allowance of £450,000), rising by £25,000 each year till it reaches £175,000 (meaning a total allowance of £500,000) in 2020.
- So now in 2018/19 the maximum that can be passed on tax-free is £900,000 for married couples or those in a civil partnership, £450,000 for others. For singles, this is made up of the existing £325,000, plus the extra £125,000. For couples, when the first one dies their allowance is passed to the survivor, so that £450,000 is doubled to £900,000.
- By the 2020/21 tax year, the tax-free amount will rise to £1 million for couples (made up of £325,000 x 2 plus £175,000 x 2) and £500,000 for singles (made up of £325,000 plus £175,000), as the main residence allowance rises.
- On properties worth between £1 million and £2 million, inheritance tax will be paid as normal on the amount above the tax-free amount.
- On properties worth £2 million or more, homeowners will lose £1 of the ‘main residence’ allowance for every £2 of value above £2 million. So for a couple, properties worth £2,350,000 or more will get no additional allowance
What should you do to plan for Inheritance tax?
1. Calculate Your Inheritance Tax Bill
The first step in any IHT plan is to ascertain what your current IHT liability would be. You might not be aware that some of the investments and insurance policies that you already own could afford significant IHT benefits. For example, we at Jonathan Richards Financial Consultancy Ltd will be able to help you ensure that the death benefits from your pensions and life assurance policies are written in trust so that the benefits don’t automatically fall into your estate on death.
2. Review Your Will
Once you know where you are, you will need to write a Will to ensure that the right people receive your legacy.
3. Make Use of Allowances
We all have a number of allowances that we can make use of to reduce our IHT liability. First, there is the £3,000 annual gift allowance per donor. This can also be backdated one year if it has not already been used.
We can then make use of our small gifts exemption by passing £250 p.a. to any number of different donees. In addition, we can gift £5,000 to a child and £2,500 to a grandchild as a wedding present. Ensure that NiL Rate Bands are utilised effectively. Finally, any gifts out of income that are ‘regular and habitual’ are also free of IHT.
Note: The Financial Conduct Authority does not regulate Inheritance Tax advice.