When does Inheritance Tax need to be paid?
The basic principles of Inheritance Tax
The basic nil-rate band threshold is currently £325,000 and has been frozen until 2020/21. The tax rate is set at 40% (June 2017). This means that Inheritance Tax will be charged at 40% on any amount in your estate above the £325,000 level unless any exemptions or reliefs apply.
It only applies to net figures. Debts and expenses are deducted before IHT is calculated.
So, for example, if your net estate, after deducting all debts and expenses, has a value of £500,000 then IHT will be charged on £175,000, which at 40% amounts to a tax bill of £70,000
Some exceptions to the general IHT principles
- IHT is not charged on any part of the estate that is inherited by the deceased’s spouse (or civil partner). This is because gifts to a spouse or civil partner are exempt from the payment of Inheritance Tax.
- Where part of the estate is the deceased’s residence, then there is an additional ‘residence nil-rate band’, or RNRB. This is £100,000 in 2017/18, rising by £25,000 a year to £175,000 in 2020/21. In order to qualify, the property must be left to the deceased’s lineal descendants. For estates over £2m, the RNRB is reduced and it is not available at all for estates that exceed £2.2m in value.
- If the IHT allowance of £325,000 (plus any RNRB) is not used up at all or completely on the death of the first spouse (civil partner), then the unused allowance will pass to the surviving spouse (civil partner) for use upon their death. This means that where someone leaves their spouse their entire estate, then by 2020/21 they will in turn be able to leave up to £1m (£325,000 x 2 plus £175,000 x 2) without any IHT becoming due.
- The tax rate will be reduced to 36% if more than 10% of the estate is given to charity.
- Inheritance Tax relief is available on certain kinds of agricultural property and business property.
Marriage and IHT
It should be noted that the advantages enjoyed by married couples (and civil partners) means that an unmarried couple could be at a distinct disadvantage. This factor needs to be taken into account when undertaking Inheritance Tax planning.
Planning for Inheritance Tax in your Will
It is important to anticipate any potential liability for Inheritance Tax when you are making your Will. Our lawyers are experienced in dealing with Inheritance Tax. They are well placed to advise you on any likely IHT issues and can offer guidance on mitigating an Inheritance Tax bill, ensuring that your Will is entirely tax efficient.
To make a Will that is tax efficient and discuss how IHT may affect you and your family call us on 01271 372128.