Everyone is currently entitled to pass on £325,000 of wealth tax free to anyone they like, regardless of whether or not they own a property. Anything above this is taxed at 40%.
Married or civil partners can transfer all assets free of tax between each other, and one partner can also inherit the other’s allowance, so in practical terms, the Inheritance Tax (IHT) liability threshold for a married couple is £650,000 and the issue of paying IHT will only become a liability on 2nd death. This is not the same for un-married couples.
The current IHT limit has remained the same since 2009. However, an extra allowance of £100,000 was introduced in April 2017 for passing on your family home. It’s called the Main Residence Allowance. The allowance increased last week (new tax year) to £125,000. When added to the IHT threshold of £325,000, it allows each individual to pass on £450,000 in 2018/19 with no IHT payable – or £900,000 per couple (rising to £1m next year).
The extra allowance only applies to the value of your main residence and can only be left to direct descendants – children, grandchildren, step, adopted or foster children. You cannot use the extra allowance if you are leaving your main residence to nieces, nephews or other relatives or friends. Importantly, the extra allowance will also not apply if a will includes a discretionary trust, even if leaving to your children. This was a popular way of preparing wills for IHT planning prior to 2007, so anyone with an old will with NRB trust should be looking to renew their will.
You can also use this allowance if you downsized after July 8th 2015 and pass on money from the sale of your property to your direct descendants when you die.
The residence allowance starts to be withdrawn once joint assets exceed £2 million.
What about gifts? Anyone can give away up to £3,000 a year, and pay no tax. This is known as the annual exemption. If unused, this allowance can be carried over to the following year, up to a maximum of £6,000. In addition there are extra limits for wedding gifts to children and grandchildren, or gifts from income. If you make a gift outside of the usual, allowable gifts under inheritance tax rules, you will need to survive seven years for that gift to be free of your estate for inheritance tax purposes. Your gifts, for the period of seven years, are known as “potentially exempt transfers”.
It’s important to get good advice and to make or review a will to ensure that your wishes are followed and to avoid unnecessary costs. Contact me for more information.