There were rumors in the Autumn Statement that the Chancellor would review Inheritance Tax, however despite widespread anticipation, this remains unchanged.
Inheritance Tax is payable on a person’s worldwide estate at 40% on the total amount over the tax free allowances.
An individual can use their Nil Rate Band of £325,000 and a further £175,000 Residence Nil Rate Band if they are passing on a house to direct descendants such as children and step-children. These reliefs are transferable between spouses. For example, Jane and John are married and they have two children. Jane dies in 2017 and she left everything to John. Jane did not make any gifts in the last 7 years, so she has a full Nil Rate Band available. John dies in 2023 leaving his estate to his two children. John has his unused Nil Rate Band of £325,000 and Jane’s Nil Rate Band of £325,000 to transfer to his estate. As he owns a house that is passing to his two children, John’s estate can use his Residence Nil Rate Band and Jane’s Residence Nil Rate Band that is transferable, so up to £1million can pass free of Inheritance Tax in Jane and John’s combined estates.
There are ways in which an individual can consider reducing their estate. They can gift £3,000 per tax year free of Inheritance Tax. Any monies over £3000 can be gifted per tax year provided that the individual outlives this by 7 years. If the individual does not outlive the gift by 7 years, then all is not lost, as there is tapering relief. There are also other gifting rules such as regular gifting out of income and a charity exemption that can help to reduce a person’s estate.
Some people think that if they give away their property, but they continue to live there rent free, then that will avoid Inheritance Tax. However, this will be seen by HMRC as a gift with a reservation of benefit, so the value of the property will be added back into the individual’s estate. There are also a number of other considerations when gifting your property, so we would always recommend that you obtain professional advice before doing so.
We provide Inheritance Tax advice in all of our Will consultations, as part of the Will drafting cost. We also offer fixed fee advice meetings to discuss Inheritance Tax and gifting. If you require Inheritance Tax advice, please contact a member of our Wills and Estate Planning Team who will be happy to assist you.