Earlier this year, changes to inheritance tax were announced in the 2015 Budget that, in theory, could leave thousands of UK residents’ estate better off. The budget changes meant that a new ‘main residence nil rate band’ could be added to the inheritance tax ‘nil rate band’ (currently £325,000). This could mean that the inheritance tax free threshold rises from £325,000 per person to a potential £500,000 per person by 2020/2021, depending on factors such as the value of your home and who the beneficiaries are.
The principle is to allow an additional nil rate band in respect of a residential property which is left on death to direct descendants. But what does this actually mean to the everyday person? Here’s our handy guide on everything you need to know about inheritance tax:
What is inheritance tax?
Inheritance tax must be paid if a person’s estate (property, money and possessions) is worth more than the inheritance tax ‘nil rate band’ threshold when they die. The rate currently stands at 40% on anything over the threshold but this can be reduced to 36% if 10% or more of the estate is left to charity. There are some exemptions such as spouses who do not pay inheritance tax whilst business and agricultural property may attract inheritance tax relief.
Who pays inheritance tax?
Inheritance tax must normally be paid by the executor of the will; in other words, the person who is named in the will to deal with the estate after death. If no will has been issued, and therefore there is no executor, the administrators of the estate are legally bound to pay any inheritance tax that is owed.
How long do I have to pay inheritance tax?
The executor is due to pay at least some of the inheritance tax within six months from the end of the month the estate owner has died. After six months, if not all the inheritance tax has been paid, interest and sometimes penalties will be charged.
Can I avoid inheritance tax before death?
You can and there are some simple ways to future-proof your estate against inheritance tax; the simplest being you can ‘give away’ some of your wealth during your lifetime. Some gifts are completely free of inheritance tax and others, which aren’t immediately exempt, will become so if you survive for seven years after making the gift. An example of estate gifts that are always tax-free include:
- Gifts to UK established charities, national museums, universities and The National Trust
- Gifts to people getting married – if you’re a parent, the maximum is £5,000 or a grandparents is £2,500
Another way to avoid inheritance tax after death is to ensure any life insurance policies are under trust which then makes them not count towards your estate when inheritance tax is calculated. Alternatively, arrange for a ‘deed of variation’ which allows your heirs to make changes to a will after death so that part of the inheritance can be reallocated to other people which in turn, spreads the inheritance tax cost and in some cases can nullify inheritance tax altogether.
If you want to find out more about inheritance tax and gain impartial advice, call Flackwoods today on 01403 738777 or email firstname.lastname@example.org and we’ll be happy to help.