Inheritance tax (IHT) has been declared the most disliked tax in a poll by the general public and it’s no surprise as to why. Like it or not, it’s here to stay but there have been a few recent changes that might benefit you if you’re thinking about planning for the future.
If the value of your estate is below £325,000 or you’re giving your estate directly to a spouse or civil partner, IHT doesn’t apply. Likewise, if you were to leave the total value to a charity or amateur community sports club IHT doesn’t take effect. Anything over that threshold will be taxed at a rate of 40%.
In April 2017, George Osbourne proposed and introduced the ‘residence nil-rate band’. This gives individuals an additional £100,000 each on top of their threshold to pass on tax-free if their estate includes the value of a home. This was introduced to factor in the housing prices that have skyrocketed in recent years. This allowance is due to rise by £25,000 every year until 2020/21, stopping at £175,000 pending review but will likely increase in line with Consumer Prices Index (CPI) from then onwards. From 6 April 2018, it will be £125,000. Including this value as part of your threshold, you will be able to pass on £450,000 as an individual in the tax year 2018/19. As the nil-rate band continues to rise, £1m will be able to be passed on by married couples and civil partners by 2020. For properties that have a value of £2 million or more, you will not benefit from the allowance by the time your estate reaches £2.25m because for every £2 over £2m, you will be taxed £1 of the allowance.
The idea of gift-giving is that you make payments to your desired recipient prior to your death to reduce the taxable amount you are left with when it comes to someone inheriting your estate. Gift-giving is an easy way of maximising the overall amount your inheritors receive. If you give a gift 7 years prior to your death, this money is exempt from tax. Anything transferred with fewer than 7 years between the date received and the date of your demise is taxable on a scale relative to how close the gift was given to your death.
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While discussing inheritance tax planning isn’t the most enjoyable topic to cover, ensuring you receive expert advice will ensure your hard-earned money doesn’t end up in the hands of taxman. It’s important to remember that while you inevitably have the futures of your family in mind, you should also have financial security in your older years.