As of April 6th 2019, certain individuals will be able to inherit up to £950,000 free of income tax, thanks to IHT allowance changes. This is set to increase to £1 million for eligible married couples and civil partners in 2020.
In this blog, we’ll look at the main changes, providing a brief overview of how you can reduce IHT on property in the coming years.
How does IHT on Property Work?
As most people know, if a deceased person leaves you something in their will, inheritance tax may be charged on the assets. However, there are several allowances that help mitigate tax liabilities, one of which is the residence nil-rate band (which was introduced in April 2017).
The main residence nil-rate band is essentially a special property allowance: this enables people to leave their primary residence to members of their family on a tax-free basis. When this was first launched in 2017, the allowance was £100,000; since then, the allowance has risen steadily (to £125,000 in 2018; and now to £150,000 in 2019). It will continue to increase until at least 2020, when it will have reached £175,000.
However, this allowance can only be taken advantage of by direct descendants of the deceased – such as a child or grandchild (other family members, such as nieces and nephews, are not eligible). In addition, the value of your estate must be taken into account: if this is valued at more than £2 million, the special property allowance will decrease by £1 for each £2 over that £2 million threshold.
What About the General Nil-Rate Band?
There’s another allowance to consider when estimating a potential IHT bill: the general inheritance tax allowance, or nil-rate band. This has been set at £325,000 in 2019-20 (and has been at this level since 2009). Both allowances can be combined to allow you to pass on up to £475,000 tax-free.
Spouses and civil partners can potentially benefit from – and pass on – even more without having to pay tax. Spouses can inherit their deceased partner’s estate without paying any tax at all; then, if they die, they can pass on the combined estate with considerable savings. Assuming the first spouse’s inheritance tax allowances have not been used up, these can be combined with the second spouse’s to leave behind up to £950,000 worth of property on a tax-free basis. This will rise to £1m in 2020.
Please note that only married couples or civil partners will be eligible to combine inheritance tax allowances in this way, though.
How Much IHT on Property Will I Pay?
Whether you’re married or not, if your estate is worth more than the allowances you’re eligible to use, inheritance tax is likely to be due. The inheritance rate is currently set at 40 , which can have a serious impact on the legacy you are passing on to future generations.
There are other ways to mitigate inheritance tax charges, however. In order to ensure that you are approaching estate planning in the most effective manner, we highly recommend that you instruct an experienced tax adviser – like IBISS & Co – to oversee your affairs. There are several options that can be explored, such as the formation of family companies, gifts and transfers, and additional exemptions. Importantly, we can bring peace of mind when it comes to your loved ones, and ensure that estate tax does not become a source of pressure or strife.
Please get in touch with IBISS & CO’s estate-planning team today for a discreet, no-obligation discussion about your plans.
