IHT is payable if a person’s estate (their property, money and possessions) is valued at more than the nil-rate band when they die. The current nil-rate band has been set at £325,000 since 2009. Anything that exceeds this is taxed at 40%.
For example on an estate worth £500,000, the first £325,000 would be exempt from IHT but tax would be due on the remaining £175,000.
The estate can pay a reduced rate of IHT of 36% on some assets if the owner leaves 10% or more to charity. Individuals can also transfer any unused allowance to their spouse or civil partner, effectively doubling the nil-rate band to £650,000 if the deceased used none of their own allowance (although this is rarely the case).
Inheritance tax (IHT) is sometimes called a ‘voluntary tax’ as there are a number of ways to minimise liability such as donations to charity and making use of gift exemptions.
Changes to inheritance tax
From 6 April 2017 people will potentially have another tool at their disposal: the £100,000 residence nil-rate band (RNRB). The RNRB (which is also sometimes referred to as the family home allowance) will apply when a family home is passed on to a direct descendant. The allowance will increase by £25,000 each tax year until it reaches £175,000 in 2020/21. After that the RNRB will increase in line with the CPI measure of inflation.
Like the existing nil-rate band, people will be able to pass on any unused allowance to their spouse or civil partner. This means that from April 2020, married couples and people in civil partnerships will potentially have a combined nil-rate band of £1 million. However, there are details and exceptions that may affect your eligibility and tax planning.
Who can inherit?
The first point to consider is that the RNRB only applies if you pass on a property to direct descendants.
Broadly speaking this means children and grandchildren but also includes:
- step children
- adopted children
- foster children
- guardian and special guardianship children.
You won’t be able to take advantage of the RNRB if you pass your home on to someone who is not a direct descendant.
Tax planning for your estate can be very complicated. To know a rough estimate of whether you are likely to be affected by the taper reduction, estimate the value of your estate by adding up the market value of property, possessions and other assets minus any debts. This is then an opportunity to review your will to see if it can be structured in a more tax-efficient way.
For example, individuals who plan to pass all their assets on to their spouse or civil partner may find that any tax saving is negated if the estate exceeds £2 million at the time of the second death.
The way in which tax charges (or tax relief, as appropriate) are applied depends upon individual circumstances and may be subject to change in the future. To get tailored help with your estate planning get in touch with your local accountants in Cheshire. Call us on 0845 054 8560.
Did you know…more than 100,000 landlords made property purchases through Limited Companies last year. There are many reasons that landlords may have chosen to plan in this way, including;
- Tax efficiency with rental profits being taxed at 20% Corporation Tax rates. Rates are expected to fall to 17% by 2020!
- Succession planning – it’s much easier to plan with company shares than give away portions of physical ‘bricks and mortar’.
- To retain the benefit from mortgage interest rate relief in a company when the Government changes for individuals comes into force in April 2017. It is thought that the mortgage interest relief changes could affect over half of all UK landlords.
- Inheritance tax planning – A recent survey of 2,517 landlords found that 61% of property in the UK is owned by the over 55 age group. This is also the age group with the most disposable income and the group that require assistance with their exit and succession planning.
The demographic ‘time bomb’ is ticking for buy to let landlords.
UK BREXIT CONSIDERATIONS:
As stipulated in Brexit speeches by Theresa May, should a scenario arise where the EU wishes to make it difficult for the UK to leave whilst imposing harsh tariffs on trade, Mrs May stated that “We would be free to strike trade deals across the world. And we would have the freedom to set the competitive tax rates and embrace the policies that would attract the world’s best companies and biggest investors to Britain.”
Would the UK therefore become a ‘Tax Haven’?
After all of the demonisation that has occurred over the last two years of the so called ‘Tax Havens’ and ‘Tax Dodgers’, it seems the UK itself may well end up lowering tax rates to attract companies as an incentive to pay less tax!!
Should you have any queries in relation to the above, please do not hesitate to contact your local accountants on 0161 359 4227/0845 054 856
The Christmas & New Year break time is always the time when families get together and begin making key succession and/or strategic business decisions that may affect their current or future tax liabilities.
According to a 2016 IHT survey done by Canada Life, 78% of people thought that wealth should be passed from one generation to the next without any tax being due, yet the fact is that many don’t understand the completely legitimate ways they can reduce their family’s inheritance tax bill!
The increase in asset values, specifically family homes and investment property, means more families are being caught out. The Canada Life survey also suggests that many families are ignorant to what assets will actually be taxed on death. The figures are staggering:
- 24% of people believe their home is not subject to IHT
- 28% of people thought their cash, savings and investments were not subject to IHT.
- 42% of people thought ISAs were not subject to IHT and;
- 51% of people thought pension savings were not subject to IHT.
What this shows is that many families are sleepwalking into a problem and leaving a legacy of tax liabilities and disorganisation for the next generation if they don’t consider careful and strategic planning.
If you would like to discuss the above then please contact us to discuss if we can be of assistance with estate and succession planning.