Two and a half years ago, the then Chancellor George Osborne handed taxpayers a boost by announcing his intention to increase the Inheritance Tax starting point on homes worth up to £1m, while keeping the basic Inheritance Tax allowance at the same level. However, the relief gradually reduces for estates over £2m so the extra relief will benefit far fewer people than initially thought.
Fast forward to 2017 and there remains little doubt that Inheritance Tax is here to stay, with Theresa May tabling the possibility of a further tax to pay for improved social care in the run up to the General Election. Although this didn’t materialise, the possibility of additional taxes to fund care for the elderly cannot be discounted.
So, what can you do to make sure your loved ones receive a fair share of your estate?
Back to basics
First of all, familiarise yourself with the basics. The Inheritance Tax rate is still 40% and that this is only charged “on the part of your estate that’s above the £325,000 threshold”. You are not required to pay anything if your estate is worth less than £325,000, or if you leave it to a spouse or charity. Basically, neither you nor your spouse will pay Inheritance Tax – it will be payable by your heirs. Spouses can combine their £325,000 exemptions so that a total of £650,000 can be left without any Inheritance being payable.
Furthermore, there is a gradual increase over the £650,000 combined exemption for homes up to £1 million but this starts to be eroded when the combined estate exceeds £2 million.
Make a will
It’s also a very good idea to make a will. If you don’t, you are effectively placing responsibility for your estate in the hands of the government and could seriously complicate the tax affairs of your spouse and children. They could be liable to pay more Inheritance Tax than they would had you taken steps to plan ahead.
Assess your assets
Next, make sure you’re fully aware of what the government counts as your assets, as this is where people tend to get caught out. Inevitably, this is not simply a question of how much money you have in your bank account. Your home, your car, your business, any investments you’ve made many gifts made within the 7 years before death and any cash sums from life insurance policies (not written in trust) all count as assets for the purposes of Inheritance Tax.
With regard to your home, if you intend to give away a home to your husband, wife or civil partner, it won’t be taxed. Note, however, that if you give your home to someone else it canadd to the value of your estate – increasing the likelihood of breaking the £325,000 threshold and adding to the amount of Inheritance Tax liable to be paid. This is because gifts with reservation (e.g. gift your home but continue to live in it rent free) are not effective for inheritance tax.
Apply for Inheritance Tax relief
Business owners, meanwhile, can apply for Inheritance Tax relief. This covers property, buildings, machinery and unlisted shares. However, relief is only available if the deceased owned the company for at least two years prior to their death, and some businesses, such as not-for-profit organisations and firms that are being wound up, are ineligible for relief. More information about what qualifies a business for Inheritance Tax relief can be found here.
Planning for the future
By planning ahead and making sure you’re fully conversant with the basics, contending with this tax can be eased.
At RWB our expert tax advisors can give invaluable tax advice on compliance and planning, as well ongoing support and guidance. Contact us on 0115 964 8860 or email firstname.lastname@example.org to arrange an informal chat.
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