Understandably, much of the focus in the world of personal finance has been on the pension changes announced last year and implemented in April.
However, there are also big changes on the horizon for Inheritance Tax (IHT) and with a recent survey from LV= showing that millions of people will rely on an inheritance to fund a comfortable retirement, we thought we’d take a look at what’s changed, whilst explaining some other IHT ‘basics’.
What’s changed?
The big change, announced by George Osborne in his recent Budget, is that IHT will be scrapped on the family home (up to a certain value) when it is left by parents or grandparents to their children or grandchildren.
Here’s how it works, and pay attention, it’s complicated!
- The current IHT threshold of £325,000 will remain in place. In simple terms this means you can leave up to £325,000 of assets without any IHT being due. Remember, you can leave unlimited assets to your spouse without IHT becoming payable, more of that later
- Married couples, as well as people in civil partnerships, can still ‘inherit’ the unused proportion of their spouse’s IHT threshold. For example, if your spouse were to die and leave their entire estate to you, then on your death your beneficiaries would be able to use the full £325,000 IHT threshold of your spouse, plus your own, effectively increasing the assets which can be left tax-free to £650,000
- To supplement the IHT threshold a new ‘main residence’ band will be introduced from 2017, which will allow you to pass on your main residence (not second homes or Buy to Let) to your children or grandchildren
- If you do not have children or grandchildren you will not benefit from the new allowance
- The new ‘main residence’ band will be added to the existing £325,000 threshold. Although it is being phased in gradually; it will start at £100,000 in 2017, and rise by £25,000 every year until it hits £175,000 in 2020
- Therefore in 2020 the effective tax free allowance for couples, where a main residence is included, will be £1 million; clearly this is reduced to £500,000 for unmarried people
We told you it was complicated!
It’s also worth adding that where a main residence is worth more than £2 million, the new allowance will be reduced by £1 for every £2 that the property is worth above £2 million.
Therefore, if your main residence is worth more than £2,350,000, your children or grandchildren will not benefit from the new allowance.
Finally, if you downsize your main residence on or after 8th July 2015 you will receive an ‘Inheritance Tax credit’ to help you to continue to benefit from the new rules.
5 other important things you need to know
Calculating how much IHT the beneficiaries of your estate will pay can be incredibly complicated; we would always recommend you get a qualified Independent Financial Adviser to undertake the task.
However, before you get to that stage there are a number of other things you need to know:
#1: IHT is not payable when you leave assets to your spouse. This is known as the ‘spouse or civil partner’ exemption. Furthermore it does not use up any of your IHT threshold, currently set at £325,000 and frozen at this level until 2020/21
#2: If your spouse or civil partner doesn’t use up their entire IHT threshold the remainder can be passed to you. This is then added to your own IHT threshold when you die. In practice this means that your estate could benefit from an IHT threshold of £650,000, provided your spouse or civil partner has used none of their allowance
#3: Tax is payable by the beneficiaries of your estate at a rate of 40% of the value of assets above the IHT threshold; this is reduced to 36% if you leave at least 10% of your estate to charity
#4: There are a number of IHT exemptions, for example:
- Money or assets you gave away over seven years ago will not be included in your estate for IHT purposes
- You can give up to £3,000 away each year and it is immediately outside of your estate for IHT purposes
- You can make as many gifts of up to £250 per year as you like and they are immediately ignored for IHT
- Any gifts you make from surplus income, which you do not need, are again immediately outside of your estate
- Gifts in respect of marriage, up to £5,000 from a parent, £2,500 from a grandparent and £1,000 from anyone else are discounted when calculating an IHT bill
- Certain investments if held for a stipulated length of time are again discounted for IHT purposes
#5: Any money you give to charities (and political parties if you are so inclined!) is immediately exempt from IHT
Take advice
This article is designed to give you some basic facts about IHT and to emphasise how complex an area it can be.
If you would like to know more about whether the beneficiaries of your estate will have to pay IHT when you die, please speak to one of our advisers. They will be happy to calculate whether or not your estate will be caught and if it is, what options you have to reduce the tax paid by your beneficiaries.
Call Sarah or Bev on 0115 933 8433 or email info@investmentsense.co.uk
We’re here to help.
Please note: The Financial Conduct Authority does not regulate tax planning
