Inheritance tax is frequently in the headlines, but for many people, it’s still something of a puzzle.

Inheritance tax affects thousands of families every year, so, it pays to think about inheritance tax while you can, and work out how much could be taken out of your estate, as soon as possible, before it becomes your family’s problem to deal with.

Inheritance tax rules

Every individual in the UK, regardless of marital status, is entitled to leave an estate worth up to £325,000. This is known as the ‘nil-rate band’.

Anything above that amount is taxed at a rate of 40%. If you are married, or in a civil partnership, then you can leave your entire estate to your spouse or partner. The estate will be exempt from inheritance tax and will not use up the nil-rate band. Instead, the unused nil-rate band is transferred to your spouse or civil partner on their death. This means that, should you and your spouse pass away, the value of your combined estate has to be valued at more than £650,000 before the estate would face an inheritance tax liability.

You don’t have to own a very large estate, or even be considered ‘wealthy’ to leave behind an inheritance tax bill. With much of the UK population’s wealth invested in their property, a growing number of families are being left with a significant inheritance tax bill to pay.

Residence nil-rate band

If you are concerned that rising house prices might have pushed the value of your estate into exceeding the nil-rate band, then the new ‘residence nil-rate band’ could be significant.

From 6 April 2017, it could be claimed on top of the existing nil-rate band. Currently the residential nil rate band is £150,000 and will increase to £175,000 by April 2020. However, claiming this new allowance is not as simple as it sounds.
It can only be claimed by the estates of people who own their own home.

It’s only available to homeowners who plan on leaving their residence to ‘direct descendants’, meaning children or grandchildren. If you don’t have any direct descendants, or you wish to leave your home to someone else, the new allowance can’t be claimed.

If you do not have a property worth at least £175,000 per person, or £350,000 per couple, you may only partially benefit.

In addition this residence nil rate band reduces for estates worth more than £2 million. Because of this tapering effect, there is a point at which claiming the allowance is not permitted.

Your estate may still be able to claim the residence nil-rate allowance even if you’ve already sold your home – for example, because you are in residential care or living with your children.

If your home was sold after 8 July 2015, and you plan on leaving the proceeds to your direct descendants, then there are provisions in place that will allow your estate to claim the new allowance. However, this doesn’t apply to homes sold before 8 July 2015.

For further information or for advice on mitigating inheritance tax, please speak to one of our advisers.

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