In its simplest terms, inheritance tax is a tax on the money or assets that a person leaves behind when they die. It can also apply to some gifts that are made before someone dies. When an individual dies, the property, money and other assets that they leave behind (minus any debts that have to be paid off) is known as their ‘estate’. This estate is usually left to the friends and family of the person who has died and effectively becomes their inheritance. This is where inheritance tax (or IHT for short) comes in. Thanks to IHT the UK government is able to lay claim to a sizeable chunk of the value of an individual’s estate when he or she dies. Inheritance Tax planning can help reduce the size of that chunk.
Of course, IHT is a tax that not everyone is required to pay. It’s only due if the deceased’s estate is valued over the current IHT threshold (£325,000 until 2018). The tax is payable at 40%* on the amount over this threshold. If the estate is valued below this threshold it falls within the nil rate band (NRB) and no IHT is payable. What this means is that an individual with an estate worth more than £325,000 will be required to pay IHT at a rate of 40% on anything above that level.
IHT might originally have been intended to help redistribute wealth from the rich back to the state, but now the NRB threshold, which affects who pays IHT, seems a little on the low side. According to the Land Registry of England and Wales, the average house price in the UK is £250,000, but in Greater London that average swells to more than £450,000. So, it’s easy to see how a large number of people will find the value of their estate extending beyond the NRB threshold simply because their home has increased in value in recent years.
In October 2007 the government allowed surviving spouses to utilise any unused Nil Rate Band from deceased partners. So in most cases a married couple will ultimately be able to pass £650,000 on to their beneficiaries upon the 2nd death without any liability to IHT.
Furthermore, in the recent budget statement (July 2015) the Government confirmed it’s intention to allow married couples to pass 1 million without any liability to IHT. However, the intention is for this to be phased in over the next 5 years and the additional allowance of £175,000 each is in respect of main residences only, needless to say the devil is in the detail.
We will sit with you and discuss your liability to IHT and the numerous Inheritance Tax planning options to reduce your estates liability to what is after all a voluntary tax. There are simple steps that can be taken to remove assets from your estate within two years without losing control or access of the capital.