It has been said that the only things that are certain in life are death and taxes. Inheritance Tax brings death and taxes together, as your assets on death are recorded, assessed and taxed according to the rules at the time.
Inheritance Tax is charged on the value of your worldwide assets (property, money and possessions) minus any debts or liabilities you have at death.
Historically only a small percentage of estates were large enough to incur Inheritance Tax, but since the 1980’s the house price and stock market booms have meant more and more families are falling into the reaches of Her Majesty’s Inspector of Taxes.
How much is Inheritance Tax?
Everyone receives a ‘Nil Rate Band’ of £325,000 – if your estate is valued below this threshold, there is normally no tax to be paid. Other general exemptions include leaving your estate to:
spouse or civil partner
a charity or a community amateur sports club
If your estate is valued at more than £325,000 and you have not left your estate to your spouse or a charity; the part of your estate above the threshold (£325,000) is liable for the tax at a rate of 40% on the excess.
So, to run a quick example – if your estate was valued at £400,000, there would be an Inheritance Tax bill of £30,000:
£400,000 - £325,000 = £75,000 excess above the nil rate band threshold.
£75,000 x 40% = £30,000 inheritance tax due
What is the Residence Nil Rate Band?
The government has reacted to recent house price increases by introducing a Residence Nil Rate Band (RNRB) on ‘family homes’. It’s in addition to the existing nil rate band of £325,000 meaning your tax-free threshold increases to £450,000 (in the 2018/19 tax year).
Your estate may benefit from this new allowance, provided that you pass your main residence to your direct descendants (such as your children or grandchildren) and your estate is not valued at more than £2m.
The RNRB is currently £125,000 which will gradually increase to £175,000 by April 2020, increasing by CPI annually thereafter.
Can I reduce the amount of tax paid?
For most people in the population, Inheritance Tax is a ‘voluntary’ tax as financial planning before death can help reduce the tax burden or mean no tax is payable. However, this is a complicated area with complex rules – it’s therefore important to seek professional advice.
In simple terms, you can reduce how much tax is paid through:
Gifting – giving away assets now so that they are outside of your estate at death
Insurance – using insurance polices which can pay the death duties raised against your estate
Leaving a legacy to charity.
If you would like to read more on Inheritance Tax, the Gov.uk site gives some top-level information, in a clear fashion here.
How do I get professional advice on Inheritance Tax Planning?
If you would like to know more about how we can help you with your inheritance planning, or help you realise any of your other financial goals, please contact us at email@example.com or call us on 01223 792 196.
About Martin-Redman Partners
We are a team of experienced Financial Advisers who can advise on your personal or business financial arrangements. We have been building trusted relationships with clients for many years by articulating clear and tailored recommendations in areas ranging from investments to retirement planning, to complex estate planning advice.
The information contained is for guidance only and does not constitute financial advice. It is based on our understanding of UK legislation, whether proposed or in force, and market practice at the time of writing. Levels, bases and reliefs from taxation may be subject to change. Accordingly, no responsibility can be assumed by Martin-Redman Partners its officers or employees, for any loss in connection with the content hereof and any such action or inaction.