The new IHT rules announced by George Osborne in 2015 are due to come into effect in April 2017.
We thought we’d take a moment to explain the changes to you.
– Currently, inheritance tax is imposed at 40% on estates worth over £325,000 though this 40% is only levied on anything over the £325,000 figure.
– Since a deceased person can pass on their entire estate tax-free to their surviving spouse or partner (provided that they haven’t used any of their personal allowance) the threshold for a widow or widower currently stands at £650,000. Any inheritance above this threshold would be liable to 40% IHT.
– So today, an estate worth £1 million would be liable to a £140,000 tax bill in total, since the first £650,000 is tax- free and 40% would be deducted from the £350,000.
– With house prices rising rapidly, it became clear that inheritance tax was hitting more and more families every year. To help counteract this, an additional ‘residence nil rate band’ of £100,000 will be made available to everyone, bringing the estate threshold up to £850,000 effectively.
– This threshold can only be applied to wealth tied up in property, and is only applicable when being ‘closely inherited’ – passed on to direct family: children, grandchildren and stepchildren.
– The threshold will rise sharply so that it reaches £1 million in total by 2020, with a £125,000 threshold planned for 2018/19, £150,000 for 2019/20, and £175,000 for 2020/21.
– Unmarried couples cannot pass on nil-rate bands to the surviving partner, which means that the surviving partner can only pass on £325,000 plus up to £175,000 (by 2020) exempt from inheritance tax. This allowance will then rise with inflation from 2021 onwards.
– To make full use of these two bands, the surviving partner must have a residential property worth at least £350,000. But if you decide to downsize to a property worth less than this (and your previous property was worth more than £350,000) you can still take advantage of the nil-rate bands as long as you keep hold of paperwork which shows the sale value of your home as well as evidence that this was your main abode.
– Unfortunately, these bands are restricted to one property – so you can’t use any remaining allowance against the value of your new home. Nor can you pass on a buy-to-let property as part of the main residence nil rate band.
– Estates exceeding £2 million will see the additional nil-rate band withdrawn, tapered at a rate of £1 for every £2 their estate is above this amount. Estates worth over £2.7 million will not benefit from the additional nil-rate band.
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Give us a call today on 01580 764243 if you want some advice on the best way to protect your assets for the future – we can help with will writing, family trusts, property trusts, probate, and even prepaid funeral plans.