In this edition of our fact sheets we are focusing on some of the main elements of Inheritance Tax.
Inheritance Tax is usually paid on an estate when somebody dies. it is also sometimes payable on trusts or gifts made during someone’s lifetime. Most estates don’t have to pay Inheritance Tax because they are valued at less than the threshold (£325,000 in 2020/21). The standard Nil Rate Band will remain at this level until 2021 and tax is payable at 40 per cent on the amount over this threshold.
Since October 2007, married couples and registered civil partners can effectively increase the threshold on their combined estate when the second partner dies – to as much as £650,000 in 2020/21. If your estate is worth more than the Inheritance Tax threshold there are some important Inheritance Tax exemptions that allow you to make gifts to others and not have to pay tax on them when you die.
The July Budget of 2015 announced the introduction of the Main Residence Nil Rate Band (RNRB) for Inheritance Tax purposes, to be set against the value of the family home. The RNRB has given each individual who has died after 6 April 2017 an additional allowance to be used against their home (or their interest in their home) provided they leave the property to their direct descendants. Any unused RNRB will be transferable between spouses and civil partners if it is unused on first death. In 2020/21 the RNRB will be £175,000, rising in line with the Consumer Price Index (CPI) thereafter. The basic conditions for the RNRB indicate that many could miss out on the benefits.
- The property must be left to direct descendants, which includes children, stepchildren, adopted and foster children i.e. not siblings, nieces/nephews, wider family members or friends.
- There is a tapered reduction of the RNRB where an estate(before deducting any reliefs or exemptions) exceeds £2m,with no RNRB for estates worth more than £2.35m. Those with valuable business or agricultural property, for example, may therefore find no RNRB is available.
- The RNRB can only be set against the net value of a property, which may mean little is available if there is a mortgage or equity release, even if the overall estate is valuable.
- The relief is assessed at each death. If the first spouse to die has an estate exceeding £2.35m they are not entitled to any RNRB, and so it cannot be transferred to the surviving spouse. The survivor should, however, be able to claim their own RNRB.
- Property left to a discretionary Will trust will have to rely on legislative provisions which, if exercised within two years of death, can redirect eligible property to lineal descendants in order to secure the relief. There is, of course, no guarantee that these legislative provisions will still be in force at the time of death.
The remainder of this document features information on:
- How lifetime gifts are treated;
- Exempt gifts;
- Payments to help with living costs;
- The seven-year rule – Potentially Exempt Transfers (PETs); and
- The importance of keeping records.
For more information download the full document.