Inheritance Tax bills are going up. Figures released last September by HMRC will concern anyone who wants to keep wealth in the hands of their family:
- Inheritance Tax (IHT) receipts of £5.4 billion in 2018/19 were a record high.
- The number of estates that paid IHT also reached its highest level.
- The average IHT bill is now £179,000.
Both the amount of tax paid, and the number of estates affected, have doubled since the threshold for paying IHT – known as the nil-rate band or NRB – was frozen at £325,000 in 2009/10. Since then, property values and share prices have surged, creating very useful extra revenue for the Treasury.
The election of the new Conservative government has put an end to the Labour Party’s radical plans to overhaul IHT, for now. And whilst chancellor Sajid Javid suggested last year that he was considering abolishing the tax, with big spending pledges to fund, it’s difficult to imagine there will be many tax giveaways from the government in the near future.
For now, families can only plan based on current legislation, and IHT remains a complex area. It’s still a tax that relies largely on confusion and inertia. However we can help make sense of this with an overview of the following main points.
Residence nil-rate band (RNRB)
The NRB is not the only threshold to bear in mind, there is also an additional Main Residence Relief available. Not surprisingly given the name, this is for your main residence which must be inherited by your direct descendants and it works in the following way:
The IHT nil-rate band (NRB) is currently set to remain at £325,000 for 2020-21. The residence nil-rate band (RNRB) increased to £175,000 from 6th April 2020 and every year from the beginning of the new tax year, the RNRB will increase by the Consumer Price index, starting from 2021/2022, thus moving in line with inflation.
For Estates over £2 million, effectively this RNRB will reduce £1 for every £2 over the threshold with everything above the threshold being taxed at 10%.
Charity begins at home
By leaving at least 10% of your net estate to charity, you not only get to leave a lasting legacy, but you may also qualify to pay IHT at a reduced rate of 36%.
Deed of Variation
Did you know you can change a person’s will after their death, providing any beneficiaries who would be potentially left worse off by the changes agree?
As long as you make the agreed changes within 2 years of the death, this change would remove an inheritance from your estate by gifting it to a new beneficiary.
Presence and Presents
You can make the most of being the ‘Bank of Mum and Dad’ (BOMAD) and help mimimise tax in the future when you pass assets on to your family. Each tax year, you are allowed to give away £3,000 of gifts, thus reducing the ultimate value of your estate. Any un-used allowance can be carried forward to the next year, although you can only do this for one year.
It is worth mentioning that if a gift meets the following criteria, they can also be exempt from IHT immediately (ie. no 7 year rule – see below):
- If they are made from normal expenditure and therefore on a regular basis establishing a pattern
- If they are made from your income and not from capital
- Any gifts must not negatively affect your standard of living as donor
- Furthermore, you can give away the following amounts each tax year, reducing the value of your estate and thus the potential IHT liability to any of the following:
- Wedding or civil ceremony gifts up to £5,000 for a child, £2,500 or a grandchild or great grandchild, and £1,000 for other people.
- Assisting with the living costs of another person, for example an elderly relative or a child under the age of 18
- Gifts to charities and/or political parties
The magnificent seven
Often known as ‘taper relief’, the 7 year rule means IHT is paid on non-exempt gifts made in the 7 years before death and are taxed on a sliding scale as below:
|Time between gift & Death||Rate of IHT|
|Less than 3 years||40%|
|7 years +||0%|