What is inheritance tax?
Inheritance tax is a potential tax paid on your estate (property, possessions and money) when you die.
There is normally no inheritance tax to pay if the value of your estate is below £325,000 or you leave everything to your spouse or civil partner, a charity or an amateur sports club.
If your estate is worth less than the £325,000 and you are married, or in a civil partnership, any unused threshold can be added to your partner’s threshold (up to £650,000), when you die.
What are the inheritance tax rates?
If neither of the above is applicable to you, tax on your estate will be charged at 40% on the amount of your estate, above any available allowances. This is reduced to 36% if you leave 10% of your net estate to charity.
Residence nil rate band
From 6th April 2017, important changes to inheritance tax are being phased in over a five-year plan, to include a new Residence Nil Rate Band.
This new band allowance is being introduced in addition to your normal Nil Rate Band allowance (£325,000).
It is being introduced in stages over the next five years;
- £100,000 for deaths in tax year 2017 to 2018
- £125,000 for deaths in tax year 2018 to 2019
- £150,000 for deaths in tax year 2019 to 2020
- £175,000 for deaths in tax year 2020 to 2021
The Residence Nil Rate Band allowance will increase in line with the Consumer Prices index from 2021.
Will the changes affect you?
By April 2020, the nil rate band allowance of £325,000 will be supplemented with a Residence Nil Rate Band allowance of £175,000 – providing an inheritance tax allowance of £500,000.
Individuals can currently pass on £325,000 to their families without paying tax, but from April that amount will rise by £100,000, before increasing to the £500,000 by 2020.
As with the Nil Rate Band allowance, any unused Residence Nil Rate Band allowance will be transferred to the surviving spouse/civil partner. Therefore, if the spouse/civil partner leaves his/her entire estate to his/her surviving spouse/civil partner, then on the second death the survivor could have an inheritance tax threshold of £1million.
Those whose value of estate falls below £650,000 need not worry and estates valued in excess of £2 million will not be eligible for the full additional allowance.
Overall, the changes will allow many families in the UK to pass on more of their property-wealth to their children without paying the levy.
Please note that there are various qualifications that have to be met before the Residence Nil Rate Band allowance can be claimed.
At Osborne Morris & Morgan, we are able to explain the rules to you and can help you review your existing Will or prepare a new Will to ensure you maximise the value of your estate for your loved ones.