MORE THAN £5.2bn PAID IN INHERITANCE TAX – HOW CAN YOU CUT YOUR TAX BILL?
Inheritance Tax (IHT) is paid if a person’s estate (their property, money and possessions) is worth more than £325,000 when they die. Your estate will owe tax at 40% on anything above the £325,000 Inheritance Tax threshold (or 36% if you leave at least 10% of your net estate to charity).
Married couples and civil partners are able to pass their possessions and assets to each other tax-free (if UK-domiciled) and the surviving partner is allowed to use both tax-free allowances (when not utilised at the first death), effectively doubling their combined nil-rate band to £650,000.
The Residence Nil-Rate Band
From April 2017, the new family home allowance, the residence nil-rate band (RNRB), applies if you leave a main residence to a direct descendant like a child or grandchild, including adopted, step or fostered children.
The RNRB is £150,000 in the 2019-20 tax year, then increases to £175,000 in 2020-21. As the RNRB can be added to the existing threshold of £325,000, this would potentially mean an overall allowance of £500,000 from 6 April 2020 for those who are single or divorced, or £1m for those who are married or in civil partnerships.
However, where an estate is worth over £2m, the family home allowance (but not the individual allowance of £325,000) reduces by £1 for every £2 of value over £2m.
Under what’s referred to as the ‘seven-year rule’, gifts made during a donor’s lifetime can be totally exempt if they survive for seven years after making the gift. If death occurs within this timeframe, IHT is payable, although taper relief applies following the third year after the gift was made, and each subsequent year up to the seventh.
Other ways to reduce your IHT liability
You can make gifts of up to £3,000 (in total, not per recipient) plus any number of gifts up to £250 per other recipient during each tax year. In addition, before the wedding day, each parent of a bride or groom can give up to £5,000; grandparents or other relatives can give up to £2,500, and any well-wisher can give £1,000. If you’re able to do so, consider making regular gifts under the ‘surplus income exemption’. This enables you, subject to a number of conditions, to make a series of gifts from your spare income, free of IHT, as long as the person who makes the gift is able to maintain their standard of living after making the gift.
IHT can be complex, so professional advice is essential.