Inheritance Tax (IHT)
The IHT threshold is currently £325,000 (2020/2021) and many people are still getting caught in the trap of property inheritance tax as the threshold has not kept pace with the inflation of property prices, and so is affecting more and more people.
There is also an additional ‘main residence’ allowance which applies if a person’s home is given to their children (including adopted, foster or stepchildren) or grandchildren. This is set at £175,000 (2020/2021) and is added to the IHT threshold providing a total allowance of £500,000 (2020/2021).
When a relative dies and leaves an estate worth more than £325,000 (2020/2021) or £500,000 (2020/2021) if the ‘main residence’ allowance applies, families are required to pay tax on a proportion of the money and property left to them within six months. After that, they are charged interest at a rate of 2.6% (2020/2021).
However, there are ways to lessen the burden of property IHT.
When you die, it is likely that you would wish to leave as much as possible for your loved ones. Unfortunately this is often not as simple as you might believe. HM Revenue and Customs (HMRC) will apply 40% tax to the value of your estate over and above that of the current threshold.
No IHT is applicable if the estate is being passed to a spouse, as the law sees your property as one estate together, unless there is a will stating otherwise, so nothing is being passed from one to another, it is merely no longer held jointly.
Your estate could include more than you originally realise. It is often easy to dismiss IHT as something that may not affect you as your property may not be over, or much over, the IHT threshold. However with all your other assets, such as investments, life cover, bank accounts, as well as physical property such as cars, furniture and family heirlooms, many estates are considerably over the threshold without the individuals being aware of it.
For assets passed between spouses and civil partners, the nil rate band allowance will pass along with the assets. This gives a couple available allowances (nil rate bands) of up to £650,000 (2020/2021), which increases to £1,000,000 (2020/2021) with the addition of the ‘main residence’ allowance detailed above.
With effect on and after 21 March 2012, if a person enters into arrangements through which they acquire an interest in excluded property such that the value of their estate is reduced, the reduction will be charged to IHT as if that person had transferred assets of that value directly to a relevant property trust.
The assets settled in the offshore trust will cease to be treated as excluded property and will instead become subject to the relevant property regime.
These provisions will also apply to existing schemes or arrangements entered into before 21 March 2012, but only in relation to periodic charges and exit charges that arise on or after that date.
For further information about the 2020 Budget changes please click here.