What is inheritance tax?
Inheritance tax (“IHT”) is a tax potentially 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, or certain other legal entities.
There may also be circumstances where your spouse or civil partner can benefit from your IHT threshold upon their death.
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 may reduce 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 started to be phased in over a five-year plan, to include a new Residence Nil Rate Band.
This new band allowance was introduced in addition to your normal Nil Rate Band allowance (which remains at £325,000).
This Residence Nil Rate Band (“RNRB”) was introduced in stages over a five year period, and allows for a specific exemption to be available in relation to your home upon your death, provided that certain conditions are met. These are most important when considering your Will and our team of experts can assist you with such decisions.
The RNRB allowance has then remained in place at £175,000 from the tax year 2020/1.
Will the changes affect you?
As outlined above, from April 2020 the nil rate band allowance of £325,000 is supplemented with a Residence Nil Rate Band allowance of £175,000 – providing a total inheritance tax allowance of £500,000.
Individuals can therefore currently pass on up to £500,000 to their families without paying tax.
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.
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.