If you’re planning on passing money or assets to your loved ones when you’re gone, your heirs could face inheritance tax bill bigger than ever before. According to the Office for Budget Responsibility, families will pay an extra £900 million in inheritance tax over the next five years.
But what does inheritance tax actually mean? Who is responsible? And how can you gift money without being taxed? Ellis Bates answer some common questions on the inheritance tax threshold, including how your family may be liable.
- What is inheritance tax?
- How much is the inheritance tax threshold?
- Does my property effect my inheritance tax?
- How do I gift property without being taxed?
- Who pays the inheritance tax bill?
- How does the RNRB differ from the NRB?
- What does the future look like for inheritance tax?
- How can I help my family?
Inheritance Tax (IHT) is the tax that your beneficiaries may have to pay if your estate (or everything you own) exceeds a certain amount. Inheritance tax is usually a one-off payment, due after your death. It’s payable on all assets you owned during your lifetime, unless there is the benefit of any relief such as business property or agricultural relief.
The current basic inheritance tax threshold is £325,000 for an individual. If the value of your estate exceeds this amount and does not have the benefit of any tax reliefs, inheritance tax will be payable at 40% on the amount that exceeds the threshold. So, for example, if your assets and savings add up to £500,000, the inheritance tax bill will be paid on £175,000 (£500,000 – £325,000). At 40%, that adds up to a bill of £70,000 to the Government – if you haven’t been savvy with your arrangements, that is!
The threshold can be transferred to the estate of a surviving spouse. So, a married couple or civil partner benefits from a combined basic inheritance tax threshold of £650,000. (Which means, in the example above, if your assets and savings add up to £500,000, no IHT needs to be paid).
The Government chose to introduce a complex piece of legislation called the Residential Nil Rate Band (RNRB) as of 6th April 2017. This is available for residences inherited by direct descendants in addition to the existing nil rate band (NRB).
If the value of your estate is above the nil rate band (NRB), then the part of your estate that is above this threshold will be liable for tax at the rate of 40%. This means that larger estates can incur a large bill.
The residential nil rate band (RNRB) currently adds a further £150,000 to the NRB. This will then increase by £25,000 next year (2020/21) to £175,000. Each person will therefore have a maximum allowance of £500,000, with surviving spouses potentially having an allowance of £1 million.
Should you pass a property onto your spouse or civil partner when you die, there is no inheritance tax to pay. However, leaving a property to another person – including children or grandchildren – in your will counts towards the value of your estate.
In addition, if your child has lived with you as a tenant before you die – and has paid you rent, or has evidence that they pay some bills – your property may be exempt from IHT. Speak to a financial advisor for more in-depth help about this.
Any money gifted more than seven years before you die doesn’t fall under IHT. You can also make up to £3,000 worth of gifts in any tax year to relatives without incurring a IHT charge. This allowance carries through to the next year if you haven’t used the previous year’s allowance. You can give as many gifts of £250 or less to unrelated friends as you like each year.
You can also gift one-off payments to your children up to £5,000 and £2,500 to grandchildren for life events, like getting married.
Be very careful, however, about giving money away if you’re planning to move into long-term residential care soon. Giving away lots of money before you move is ‘deprivation of capital’ and that affects your entitlement to state help for your (or your spouse’s) care.
The most common method of paying inheritance tax is from the estate – or everything you own minus mortgage debt, and funeral expenses. However, if the tax is due on the gifts you made during the last seven years of your life, the people who receive the gifts must pay the amount due.
The RNRB differs from the NRB in that it doesn’t apply to lifetime transfers, such as transfers into trusts or gifts given by an individual within a period of seven years before they died. This means that whilst the NRB could potentially be consumed through gift-giving in the last seven years of a person’s life, the RNRB would still be fully available.
Although the threshold remains steady, the property market is continuing to rise. This means that many families will continue to face larger inheritance tax payments. Those in the south of England, where property prices have risen dramatically over the past 20 years, will undoubtedly feel ensnared by the 40 per cent charge.
Making sure your will is up to date and tax efficient, you can maximise the amount loved ones may receive. However, as each person’s circumstances can greatly differ, it’s important to seek professional guidance on all inheritance tax matters. Ensure you are taking all the steps you need to minimise your inheritance tax bill after you pass.