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Inheritance Tax

 

Advice for people worried about Inheritance Tax

 

The Chancellor announced, on the 9th October 2007, that the Inheritance Tax allowance would be transferrable between husband and wife. Most reports instantly got this wrong by announcing that the nil rate band had increased to £600,000; it hadn't.

 

In the past, unless either the husband or wife in a married couple (or equivalent in a civil partnership) passed their nil rate band outside their estate more than 7 years before their death, then this allowance would come back into calculation and therefore effectively be lost. Whilst each individual had a £300,000 allowance, it was not transferable between partners as above. For the 2016-17 tax year, the nil rate band has been retained to £325,000.

 

It is still not transferable between co-habitees and single people still only have a £325,000 allowance. If you are divorced and not widowed, your nil rate band is still £325,000.

 

The Government has introduced a “family home allowance”, eventually worth £175,000 per person, to the existing £325,000 tax free allowance from April 6th 2017.

This means that if you own a property worth up to £1m you will be able to leave it to children or grandchildren completely free of inheritance tax from April 2020. However, if a couple have no children this allowance cannot be utilised.

This additional allowance will be £100,000 in 2017/18, £125,000 in 2018/19, £150,000 in 2019/20, and £175,000 in 2020/21. This will allow individuals to pass on assets worth up to £500,000, including a family home, without paying any IHT at all. For married couples and civil partners, the total is £1m.
This additional allowance will be gradually withdrawn for estates worth more than £2m.

Anyone who wants to downsize to a smaller property will be eligible for an “inheritance tax credit” so that even if they sell an expensive property they will still qualify for the new threshold providing the bulk of the estate is left to direct descendants.
 

Inheritance Tax affects more and more people, most of whom never dreamed that their “estate” was an “estate”, nor that the family home that they had sometimes struggled to keep together would one day be a source of revenue for the Exchequer rather than a source of wealth that they could pass to their children and grandchildren.

 

Everyone has an Inheritance Tax nil rate band of £325,000 (2017-2018 tax year). In addition there are annual allowances which haven’t changed for years and whilst they haven’t become exactly meaningless, they have faded in significance:-

  • £3,000 can be given each year to anyone (you can “mop up” 1 years unused allowance

  • £250 can be given to any number of people (but not to the recipient of the £3,000)

You can make some generous wedding gifts

  • £5,000 to your children

  • £2,500 to your Grandchildren

  • £1,000 from anyone else

Payments for the maintenance of your spouse, ex-spouse, dependent relatives and, usually, your children who are under 18 or in full-time education will also be exempt from Inheritance Tax.

 

The flat rate of Inheritance Tax over the nil rate band is 40%. Transfers between husband and wife are free of Inheritance Tax. In the past, leaving all you owned to your spouse might have seemed the most obvious choice but all it meant in reality was that you forewent your own nil rate band.

 

In 2004 the Capital Taxes office took steps to close certain loopholes that existed previously and some dubious Inheritance Tax avoidance schemes will either be undone and be subject to Inheritance Tax or will suffer the Pre-Owned Asset Tax (POAT). Schemes caught by this legislation included “double trust” arrangements where everything was put into one name with a spouse as a trustee/beneficiary, then some time later the election removed so that the person setting up the arrangement could also enjoy the income. This will not work any more.

 

A number of legitimate Inheritance Tax mitigation schemes do remain and after estates are equalised where possible, that is to say assets owned between husband and wife are held in roughly equal proportions, then, if the surviving spouse would be able to manage financially on the death of the partner, these assets can be distributed to the family either in the lifetime of the donor or on death, using a Will Trust.

 

 

 

 

 

Align Wills and Trusts

     
 
Inheritance Tax Planning Norwich,Norfolk. Inheritance Tax Planning Norwich,Norfolk

 

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Tax advice is not regulated by the Financial Conduct Authority.
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