Inheritance Tax

Inheritance tax planning is a complex area, however careful planning helps ensure you take advantage of all the allowances and relief’s available and could save you a lot of money.

The Financial Conduct Authority does not regulate taxation and trust advice.

When you die, the Government assesses how much your estate is worth, then deducts your debts from this to give the value of your estate. Your assets include:

  • Cash in the bank
  • Investments
  • Any property or business you own
  • Vehicles
  • Payouts from life insurance policies if not in trust

Your estate will owe tax at 40% on anything above the £325,000 inheritance tax threshold when you die (or 36% if you leave at least 10% to a charity) – excluding the ‘main residence’ allowance (see below).

IHT to be scrapped on up-to-£1m homes by April 2020

Former Chancellor of the Exchequer George Osborne revealed in July 2015’s Summer Budget that he’d scrap the duty when parents or grandparents pass on a home worth up to £1 million (£500,000 for singles). This is being phased in gradually until April 2020.

However, the way this works in practice takes some explaining…

The basic allowance is unchanged

The current allowance whereby no inheritance tax is charged is on the first £325,000 (per person) of someone’s estate – which is the value of their total assets they leave behind when they die. Couples can leave a home worth £650,000 without it attracting inheritance tax (singles £325,000). Above the threshold, the charge is 40%. This remains unchanged. What has changed is the introduction of a new ‘main residence’ band.

How does the new ‘main residence’ band work?

New for the 2017/18 tax year was the additional ‘main residence’ allowance. It is only valid on a main residence and where the recipient of a home is a direct descendant (classed as children, step-children and grandchildren). This is gradually being phased in as follows and is what you’ll get on top of your existing allowance:

  • For this tax year it’s starting at £125,000 (meaning a total allowance of £450,000), rising by £25,000 each year till it reaches £175,000 (meaning a total allowance of £500,000) in 2020.
  • So now the maximum that can be passed on tax-free is £900,000 for married couples or those in a civil partnership, £450,000 for others. For singles, this is made up of the existing £325,000, plus the extra £125,000. For couples, when the first one dies their allowance is passed to the survivor, so that £450,000 is doubled to £900,000.
  • In 2020, the tax-free amount will rise to £1 million for couples (made up of £325,000 x 2 plus £175,000 x 2) and £500,000 for singles (made up of £325,000 plus £175,000), as the main residence allowance rises.
  • On properties worth between £1 million and £2 million, inheritance tax will be paid as normal on the amount above the tax-free amount.
  • On properties worth £2 million or more, homeowners will lose £1 of the ‘main residence’ allowance for every £2 of value above £2 million. So for a couple, properties worth £2,350,000 or more will get no additional allowance.

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