In recent years there has been an increase in the amount people are paying in Inheritance Tax from the Estates of their loved ones.
Whilst the increase in Inheritance Tax payable is as a result of a combination of factors, a large contributing factor is the increase in the value of our homes but also that families are not planning for Inheritance Tax in their lifetimes. It is too late to plan for Inheritance Tax after someone has died! Dagmara Kulczykowska, Head of Private Client Services explains who benefits.
The current Inheritance Tax threshold per deceased person is £325,000, known as the Nil Rate Band (NRB). This is frozen until 2020/21. In addition, from 6th April 2017 an additional tax exemption is available called the Residence Nil Rate Band (RNRB) which currently stands at £100,000 per deceased person and it can be applied to Estates where the death occurred after 6th April 2017. To qualify you must own a property, or a share of it, which you have lived in at some stage and which you leave to direct descendants (children grandchildren or step-children). The RNRB will rise to £125,00 in 2018/19, £150,000 in 2019/20 and £175,000 in 2020/21. There are criteria but provided you meet these the RNRB will reduce the amount of Inheritance Tax payable.
Both the NRB and the RNRB are transferable between spouses if it is not used in whole or in part when the first spouse died, even in the first death occurred before 6th April 2017. Meaning that when the second spouse dies both the NRB and RNRB can be doubled up.
So, currently, in an Estate where a married couple who have an adult child, have both died and where on the first death the estate passed entirely to the surviving spouse and that spouse has now died leaving their whole estate to their adult child – that Estate will have a tax free amount of £850,000 (2x £325,000 plus 2x £100,000). If the Estate exceeds this amount the tax payable on the Estate exceeding £850,000 is 40%.
There are other tax saving steps you can take to reduce the Inheritance Tax bill such as making use of the annual tax free gift allowance of £3,000 per person or make a larger gift but survive for 7 years, create a trust, make gifts to charity, take out life insurance or spend it (making sure not to leave yourself short!).
Of course, one of the most important aspects of lifetime planning is to ensure that you have a valid Will which you review regularly to ensure that it works with the current regulations and your wishes.
To arrange an estate planning consultation or if you require assistance with your Will or administering a Will after the death of a loved one please contact our Private Client Services Team on 01908 689 317.