What Are the Latest Rules on Inheritance Tax?
The topic of inheritance tax regularly crops up in the news, but do you actually know about the rules surrounding it?
In this short guide, we'll look at the latest rules on inheritance tax, which are changing all the time, including the most recent significant change introduced in April 2017.
What Is Inheritance Tax?
Often referred to simply as IHT, inheritance tax is a tax on your estate. This includes any property, money, savings, assets, etc that you leave behind when you die.
When it comes to your personal tax planning, it's important to think beyond your death as well as just the coming years, and it’s so important to plan for what will happen to your estate when you are not around.
When Do You Start Paying Tax?
If the total value of your estate is worth less than £325,000, you won't have to pay any inheritance tax on it. However, if your estate is worth more than this, your heirs pay inheritance tax on everything over this value.
Before this happens, you will subtract any debts owed upon your death, as well as any funeral expenses that you pay for out of your estate, and the total value of your estate is what is left.
This £325,000 is called the 'nil-rate band', which is the tax-free allowance. This is the current rate for the 2017-18 tax year, and it is frozen until 2019.
How Much Tax Do You Pay?
You will pay 40% on anything over the nil-rate band. So if your total estate is worth £400,000, you would take off the £325,000 tax-free allowance and then pay 40% of the remaining £75,000 (which would be £30,000).
When Do You Not Pay Tax?
There are some circumstances in which you will not pay inheritance tax. These include when you pass on all of your estate to your spouse or your civil partner.
However, if you pass on your estate to your children or anyone else, you will pay inheritance tax.
What About Gifts?
Some gifts are tax free, which include gifts between spouses and to charities. Some gifts are sometimes tax free, and these are called potentially exempt transfers (PETs).
It all depends on when they are made. Usually, if gifts are made more than seven years before your death, no tax is due.
How Is the Tax Paid?
The tax is paid from your estate, and what is left over is then paid out to the beneficiaries.
But if you have given any gifts within seven years of your death, the people who received the gifts will have to pay the tax. If they cannot pay, the amount due comes from your estate.
The tax must be paid six months after you die, and the heirs will pay this from your estate. They will need an inheritance tax reference number from HMRC to do this.
What Was the Change Introduced in 2017?
A new change to inheritance tax was made in April 2017. Now, if you leave property to a family member like a child, you can pass on £100,000 more without paying tax, so the total tax free allowance is £425,000.
In April 2020, this will go up again by another £75,000 to £500,000.
This means a couple who are married or in a civil partnership can pass on up to £850,000 tax free including the family home, and this will go up to £1 million in 2020. (You can read more about the new rule here.)
However, there are loopholes to be aware of, so make sure you speak to a specialist when you are planning your estate.
Plan for Your Passing
Inheritance tax planning is a very good idea, even if you don't think it is something you will have to worry about for a long time.
Start off by talking to an accountant. We will be happy to advise you on your current situation as well as all the rules on inheritance tax so you can plan in the most tax-efficient manner for the future and make a will that reflects your wishes.
It's never too early to start, so get in touch and let us help you plan your estate.