The Conservatives are said to be considering scrapping inheritance tax (IHT) in a bid to win votes in the next general election. The suggestion has prompted considerable discussion.
It is worth considering how IHT works at present, and how much of a concern it might be for you.
What is IHT?
IHT is charged on estates (property, bank accounts, most investments, personal belongings, etc.) valued above the tax-free allowance of £325,000 at the date the owner dies.
If the deceased person has made gifts of more than £3,000 in any of the seven years before their death, then the value of those gifts may be counted within the estate as well. If they leave their estate to a surviving husband, wife or civil partner, or to charity, then the gift is likely to be exempt. If the deceased owns their home, and leaves their estate to lineal descendants – children, grandchildren, and so on – then there is an additional tax-free allowance of £175,000.
This allowance is called the Residence Nil Rate Band (RNRB). It means that an individual homeowner with children has a maximum taxfree allowance of £500,000 to leave on death.
What can I leave tax-free?
IHT allowances can be transferred between spouses/civil partners. For example, if a husband dies leaving his estate to his wife, this gift will be exempt from inheritance tax. When his wife passes away, her estate will benefit from not only her own tax-free allowances of £500,000, but also those she inherited from her husband.
Married couples who own property and leave their estates to their children on the second death can therefore pass a total of £1 million before IHT becomes payable. Any value over £1 million is taxed at 40%.
The RNRB was introduced in April 2017 to allow the Conservatives to fulfil a previous pre-election promise, to increase the tax-free allowance to £1 million. This has arguably been achieved, but only for married couples owning property and leaving their estates to their descendants. It is not available for non-property owners or those without children. It may be the case that a promise to scrap inheritance tax, if it comes to fruition, is similarly available only in certain cases.
For the time being, IHT is something that does worry many people. It is a complex area so if you would like further guidance, or if you would like to explore your options to reduce your own estate’s tax liability, please contact Laura at laura.walkley@twmsolicitors.com.
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