Inheritance Tax – Frequently Asked Questions
Understanding Inheritance Tax
Whilst originally set up as a wealth tax, Inheritance Tax no longer affects only the wealthy. Although, most people are aware of the existence of IHT, it’s a subject that gives rise to some distaste or lack of interest and many, not surprisingly, would rather delay consideration of the matter.
As a result, so few people do anything about their potential IHT liability, HMRC collected £5.1 billion in the 2016/17 tax year and it's predicted that, by 2020/2021, one in ten estates will be liable for IHT.
Some people see Inheritance Tax as being a voluntary tax in that, there are ways to structure your assets to mitigate your IHT liability – something we specialise in at Heritage Will Writing.
The information on this page will give you a much greater understanding of Inheritance Tax, how it works and how it may affect you.
Inheritance Tax (IHT) is a tax on the transfer of assets on certain lifetime gifts and on death.
Death duties have been with us for centuries in the guise of Estate Duty, Capital Transfer Tax and now Inheritance Tax. Whatever the name, the purpose has always remained constant: to raise revenue from the estates of citizens on their death.
Normally, there’s no Inheritance Tax to pay if the value of your estate is below the £325,000 threshold or if you leave everything to your spouse or civil partner, a charity or a community amateur sports club.
Inheritance Tax is paid at a rate of 40% on everything above the Nil Rate Band (NRB) or Threshold.
Currently, the NRB or threshold is set at £325,000 for an individual.
If you leave your home to your children (including adopted, foster or stepchildren) or grandchildren, your NRB / threshold will increase to £425,000 because of the new Residential Nil-Rate Band (RNRB).
Since 9 October 2007, a surviving spouse (or civil partner) can use the unused percentage of their deceased partner’s NRB on their subsequent death, in addition to their own NRB.
It's often the case that your family home will form a disproportionately large percentage of your estate, leading to other assets easily pushing your estate value over the nil rate band limit.
The Residential Nil-Rate Band (RNRB), also known as the Main Residence Nil-Rate Band, will increase your Nil-Rate Band allowance to compensate for the large portion of your estate that your property will form.
This allowance will increase until 2021/2022 and the figures for individuals are as follows:
- For the 2017/2018 tax year the RNRB will be £100,000 saving up to £40,000 in IHT
- For the 2018/2019 tax year the RNRB will be £125,000 saving up to £50,000 in IHT
- For the 2019/2020 tax year the RNRB will be £150,000 saving up to £60,000 in IHT
- For the 2020/2021 tax year the RNRB will be £175,000 saving up to £70,000 in IHT
Thereafter, the RNRB will increase each tax year in line with the Consumer Price Index.
For Married Couples and those living in a Civil Partnership, the benefit is double that shown above.
For the Residential Nil Rate Band to apply, the main residence must be left directly to the beneficiary as a lineal descendant; this includes biological children, stepchildren, adopted and foster children or a further descendant such as a grandchild.
Where there is more than one property forming part of an individual’s estate, the executors will have discretion over which property will apply to the RNRB. However the individual must have lived in the property at some point for the RNRB to be applicable.
A property that was never considered “a main residence” such as a buy-to-let property would not qualify for RNRB.
Although the RNRB will provide a safety net for most people with IHT liabilities on their estate, there are some exceptions.
If the main residence that forms part of the estate is not left to their children or a lineal descendant the RNRB will not apply. This would include if the property is placed into trust, as the residence would not from part of the estate.
If the main residence was sold and the individual moved into a care home but the proceeds were not inherited by direct descendants, the RNRB would not be applicable.
There are special terms applied to estates with values of £2,000,000 or over.
Should an estate reach this value after the deduction of liabilities but before reliefs and exemptions, the RNRB will start to be withdrawn at a rate of £1 for every £2 over the threshold. Due to this an individual with an estate of £2.35 million and a couple of an estate of £2.7 million would not be able to benefit from the RNRB at all.
The RNRB can be transferred between married couples and civil partners in the event of death.
This will only apply where the second spouse or civil partner should pass on or after the 6th April 2017, irrespective of when the first spouse or civil partner passed away.
Personal Representatives of the deceased will need to make a claim to HMRC to enable the transfer of any unused proportion of RNRB.
There are certain exemptions available, which allow you to make tax free gifts. In this section you'll find out more about the different exemptions and how they work.
Under the Annual Exemption, you can give away up to £3,000 in gifts each tax year, without any tax liability.
This means that a Married Couple or those living in a Civil Partnership can give away up to £6000 in gifts between them.
Other exemptions include:
- Wedding or civil ceremony gifts of up to £1,000 per person (£2,500 for a grandchild or great-grandchild, £5,000 for a child).
- Normal gifts out of your income for birthdays and Christmas (providing you can still maintain your standard of living after making those gifts).
- Payments to help with another person’s living costs (an elderly relative or child under 18) and
- Gifts to charities and political parties.
You can use more than one of these exemptions on the same person - for example, you could give your grandchild gifts for her birthday and wedding in the same tax year.
You can give as many gifts as you like (up to £250 per person), providing you haven’t used another exemption on the same person.
Potentially Exempt Transfers (PETs) are larger gifts that may be exempt from IHT, providing you survive for 7 years after making the transfer.
If you die within 7 years, the transfer will be treated as a gift and IHT becomes payable on a sliding scale, depending on how long survived:
- If you survive less than 3 years, IHT is paid at 40%
- If you survive 3 to 4 years, IHT is paid at 32%
- If you survive 4 to 5 years, IHT is paid at 24%
- If you survive 5 to 6 years, IHT is paid at 16%
- If you survive 6 to 7 years, IHT is paid at 8%
After 7 years, any gifts or PET's you made are not counted towards the value of your estate.
The information provided here is intended to address the types of questions that people are often concerned about.
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