Your Guide to the New Inheritance Rules
The rise of property prices across the UK has lead to an increase in the number of people being caught out with a large Inheritance Tax liability hanging over their heads.
If you are looking to safeguard your hard earned wealth for your children and future generations, you will need a basic understanding of how the Inheritance Tax (IHT) rules could affect you.
IHT is often viewed as a tax payable upon death, but actually contrary to belief, the decisions you make during your lifetime do have an impact on the final IHT bill left to your loved ones.
IHT rules were recently amended and here we review how these changes have a direct impact on your wealth now and going forward.
How does Inheritance Tax affect me?
There was an increase in the IHT Threshold in 2017 which now allows for more individuals to pass on the family home to immediate family members without the burden of IHT.IHT rules are complex and dependent on individual circumstances. To review your own plans in terms of IHT implications please contact us to see how we can help.
Although a controversial and unpopular tax, IHT is commonly misunderstood, mainly due its complexity.
If you thought IHT only affects very wealthy individuals, think again; in actual fact it affects thousands of families every year.
Did you know that the amount of IHT collected by the tax man has doubled over the last five years?
One major reason for this dramatic increase is as result of increasing house prices nationally which is pushing individuals above the current IHT-free threshold of £325,000. The Government introduced new rules in 2017 which increased the tax-free amount for homeowners, eligible only for properties gifted to children or grandchildren.Although this does give some respite to the growing population of people affected by IHT, it is vitally important that you understand the IHT rules and how they affect you personally so you are able to act now in life to ensure your loved ones are not hit with an IHT bill which could otherwise been avoided if you had planned well during your lifetime.Without the right advice and careful financial planning, HM Revenue & Customs could become the single largest beneficiary of your estate following your death.
What do I pay Inheritance tax on?
Inheritance Tax is charged at 40% on your total assets which exceed the ‘nil rate band’ threshold, which is currently set at £325,000.Inheritance Tax is payable to HMRC when you die. The assets considered when reviewing your financial position on your death, include:
Any property you own, both personally and for business purposes
If you own a business, the value of your business is taken into consideration
Cash and investments held at time of your death
Your personal possessions, including cars, jewellery, art
Payouts from life insurance policies
As you can see, HMRC could be perceived as being ruthless in their approach when reviewing your financial position upon death with the majority of your assets will be taken into consideration.
Only pensions are safe from the taxman, as they sit outside your 'estate'.By way of an example, your estate on your death has been valued at £600,000 of which £325,000 is free from IHT charge, due to the tax-free IHT threshold. Your final IHT tax bill will be 40% of the remaining value of your estate, £275,000, which will be £110,000.
It falls on your beneficiaries, or the people you leave behind, to pay for this final IHT bill.Certainly not the legacy you imagine leaving behind to your loved ones!
How can I reduce my IHT bill?
The good news is that there are things you can do now in your lifetime to help reduce your potentially large IHT tax bill.We can help review your personal circumstances now and on an on-going basis to ensure you are well positioned to reduce your IHT bill upon your death.
Contact us to see how we can help.
New Inheritance Tax Rules coming
From 5 April 2021, under the new IHT rules more estates are likely to escape Inheritance tax, with majority of estates worth up to £1 million, avoiding IHT altogether.This is a positive move in the right direction for the growing base of individuals now affected by IHT, but does not provide the whole picture. For example, those individuals without children could, upon death, face a higher IHT bill.
If you own a home, your IHT-free threshold is going up
The plan is for another nil rate band to be introduced for individuals who own a home and who plan on passing their main residence on to a direct descendant at the time of their death. Direct descendants include children, stepchildren, adopted children, foster children as well as grandchildren. This additional ‘residence nil rate band’ is set at £125,000 in the 2018/19 tax year and will increase by £25,000 each tax year, reaching £175,000 by 6 April 2020.
This extra nil rate band will be in addition to the existing nil rate band of £325,000 (which will remain at this level until 2020/21). As with the existing nil rate band, any unused additional nil rate band can be transferred to a surviving spouse or registered civil partner, resulting in an effective inheritance threshold of £1 million for a couple with children that they wish to inherit the property. This means that by 2020/2021 an individual will potentially be able to leave £500,000 IHT free to direct descendants.
I'm downsizing, will I benefit?
The introduction of the additional nil rate band is available for individuals who have downsized or sold their home on or after 8 July 2015, as long again as you pass on your wealth to the equivalent value to your direct descendants. Where the deceased has down-scaled or sold their main residence on or after 8 July 2015, it will still be possible to pass on the proceeds of the family home and make use of the residence nil rate band.For example, an individual who sells their £300,000 home and purchases a £150,000 home could benefit from the maximum allowance of £175,000 in 2020/21 if they leave their home and assets of £25,000 to direct descendants on death. They will be liable to Inheritance Tax only if their total estate exceeds £500,000.
The additional residence nil rate band can only be taken advantage of for estates up to £2 million, with a tapering taking place after that on more valuable estates.
How Inheritance Tax Rules Will Affect You If You’re Single Or Have No Children
The nil rate band of £325,000 is now frozen until at least April 2021. This means that for unmarried couples, and those couples who leave no children or grandchildren, the IHT-free band will, unfortunately, be eroded by inflation and will ultimately lose out. A single person owning property in London, for example, is highly likely to leave an estate subject to IHT.
We can help
The actions you need to take now to protect your wealth will depend on your family’s needs for capital and income, as well as your current assets and your intended beneficiaries of your estate. Looking at these in unison in the context of your IHT position requires expert advice, and Mirandus Accountants are here help.
Mirandus Accountants are your local accountants and tax advisors in Farringdon, Holborn, Clerkenwell, Blackfriars, Old Street and also Edinburgh & the Lothians, providing accounting services, tax returns, corporation limited annual accounting and are your trusted tax adviser, providing national and international advice.
You can contact us for a tailored solution to your unique business circumstances.Whether you are an individual, freelancer, contractor or you run a small or medium sized owner-managed business, sole trader or limited company, we can help to minimise your tax burden with our tax planning and tax advice services.We strongly recommend you speak with a tax and accounting specialist like Mirandus Accountants, a chartered advisory tax practice, who can provide expert advice for your business and personal tax planning needs.
