Inheritance Tax is affecting more and more people, but how much do you know about Inheritance Tax? ... Will it be applied to your estate?... How much tax will need to be paid by your beneficiaries?...
Inheritance Tax is one of the highest rates of tax in the UK and in the 2018/19 tax year Inheritance Tax receipts by HMRC totalled a staggering £5.4 billion (source: www.gov.uk).
You may be wondering what you can do to mitigate any potential Inheritance Tax liability, or maybe you are concerned that there may be consequences of Inheritance Tax planning? Maybe you have no idea whether the beneficiaries of your estate could face an Inheritance Tax bill or not. I can help with any questions you may have and in this article I will explain how Inheritance Tax is calculated and the reliefs available. If you're interested in finding out more about the options available, I've written a separate article which discusses the range of options available to you.
When Does Inheritance Tax Apply?
One of the most important things to be aware of is that Inheritance Tax does not apply on transfers between spouse. So if a husband dies and leaves everything to his wife, no Inheritance Tax is chargeable. However, if the estate is subsequently left to the couple’s children on the wife’s death, the children could then face an Inheritance Tax bill. This will be dependent on the value of the assets left to them.
Everyone has what’s called a ‘Nil Rate Band’ of £325,000 (correct as at 2020/21 tax year). This means that they can leave assets up to the value of £325,000 to their chosen beneficiary(ies) with no Inheritance Tax to pay. If a spouse dies and leaves everything to the surviving spouse, as in the example above, their Nil Rate Band is also transferred to the survivor, which means that they then have double the standard Nil Rate Band, so assets of up to £650,000 can be left to their chosen beneficiary(ies) with no Inheritance Tax liability. Effectively, a married couple have a joint Nil Rate Band of £650,000 (as at 2020/21 tax year).
From 6th April 2017, the Residence Nil Rate Band (RNRB), sometimes referred to as the ‘Additional Nil Rate Band’, was introduced. It has increased in value since it’s introduction in the 2017/18 tax year and is currently £175,000 per person (so a married couple will have a joint RNRB of £350,000, correct as at 2020/21 tax year). From now on, the RNRB will increase each year in line with the Consumer Price Index (CPI).
For the RNRB to apply, there are certain rules. The main residence must be left to a direct descendant i.e. a child, grandchild, step child, adopted child or foster child. If more than one residential property is owned, the personal representatives for the estate can nominate which property the allowance should be offset against. The RNRB cannot be applied against a property that is not classed as a residence of the deceased, for example, a Buy to Let property.
The Nil Rate Band and RNRB therefore give a married couple a combined threshold of £1million (assuming their main residence is valued at £350,000 or more and is left to a direct descendant). A single person has combined Nil Rate Bands totalling £500,000. Assets above this limit will be subject to Inheritance Tax (thresholds correct as at 2020/21 tax year).
The RNRB can be reduced, or even lost completely, if the value of the estate exceeds £2million (correct as at 2020/21 tax year). This is particularly important if the value of a couple’s estate exceeds £2million jointly, but individually their assets are worth less than this. In this scenario it’s really important to get professional advice.
If you’ve downsized, or sold your home to move into residential care, since 8th July 2015, current rules allow for you to be compensated for lost RNRB with a ‘downsizing addition’.
What Is The Rate Of Inheritance Tax?
The standard rate of Inheritance Tax is 40%, the rate is lower (36%) if you leave at least 10% of your ‘net estate’ to a registered charity (‘net estate’ is calculated as the value of your estate after deducting the available nil rate band, so the taxable portion of your estate, rates correct as at 2020/21 tax year).
Options Available
If you're interested in finding out more about the range of options available to plan for Inheritance Tax and mitigate any potential liability, please read my article 'Options Available for Inheritance Tax Planning' coming soon...
Charlotte Owen
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