There are few more confusing taxes than inheritance tax (IHT).
For older generations, the prospect of paying up to 40% tax on what they leave behind is difficult to contemplate. For some children and grandchildren, grappling with IHT is something they are ill-equipped to do.
Yet more and more families are going to have to deal with IHT. The latest figures from HM Revenue and Customs show the government collected £5.1billion in IHT in the 12 months to May – up 9% on the same period last year.
IHT is likely to be even more of a money-spinner for the UK Government in future; the Office for Budget Responsibility predicts receipts will increase to £6.2billion by 2020/21.
Many more families are being dragged into paying the tax, thanks to soaring house prices, while land and buildings transaction tax costs are making elderly people think twice about downsizing.
But there are steps families can take to mitigate IHT’s impact. There are two crucial elements: taking advice and planning.
The earlier you start thinking about IHT, the easier – and less damaging – it is, and the more options you have.
This does not mean that, if you leave it late, it’s too late as there are still things you can do; they are just more limited.
New rules introduced in April allow you to pass on more of your estate free of IHT, however, many people are not fully aware of the thresholds so it’s important to be clear on the facts.
The threshold at which your estate becomes potentially liable for IHT at 40% is £325,000 per person. In the 2017/18 tax year, there is an additional £100,000 “residence nil rate band” (RNRB) which can be used against the value of your property – but only if you leave it to a child or grandchild.
RNRB is expected to rise gradually by £25,000 a year to £175,000 per person from April 2020.
Crucially, the £325,000 threshold and new RNRB are transferrable – meaning you can pass both tax-free allowances onto your spouse or civil partner when you die.
With RNRB increasing to £175,000 in 2020/21, a couple could eventually pass £1million to their children or grandchildren without attracting IHT.
While some genuinely generous reliefs have been introduced, the devil often lies in the detail and when it comes to IHT planning advice is essential.
The reliefs often come with caveats and unless you understand what these are you are making assumptions. Quite often, those assumptions are wrong.
For example, those without children cannot benefit from RNRB – if you leave your home to a niece or nephew, there will be no additional allowance.
Likewise, RNRB may not be available when a property has been left in trust and not to a direct descendant. It may be appropriate for those who have put such arrangements in place to review their wills.
Estates valued at £2million or more will lose £1 of RNRB for every £2 of value above the threshold. If your estate is currently worth more than £2.2million, therefore, there will be no RNRB.
Even if you do not consider yourself to be particularly wealthy, you may still find the value of your individual or combined estates exceeds the tax-free thresholds, so anything that reduces a potential IHT bill is worth considering.
Thoughtful estate planning can help you pass wealth onto your designated beneficiaries in the manner you choose, while reducing your taxable estate.
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