What do you need to know about inheritance tax?
Inheritance tax is a tax on the estate of someone who has died, and with property prices continuing to rise along with the recent introduction of the residence nil rate band (RNRB), the number of people that will become liable for inheritance tax will only increase. In this article, we look at a few key things that you need to know regarding inheritance tax.
Reviewing your Will
It is often thought that having a will in place can reduce your inheritance tax liability. In actual fact, the main function of a will is to state who will inherit your assets. With legislation continuously changing, it is recommended that you check your will frequently, maybe even as regularly as every four to five years. This reduces the chance of something in the legislation changing and having to pay unnecessary tax.
Joint tenancies are very common nowadays, and both tenants have equal rights to the property. But what happens if one of the tenants dies? Everything is passed on to the surviving tenant with zero inheritance tax and, for this instance, the nil rate band (NRB) and residence nil rate band (RNRB) are also passed over. This means that the new tapering rules will apply if the estate is worth more than £2m following the death of the second tenant and if it is worth more than £2.2m (as of 2017) the full RNRB allowance will be lost.
Frozen nil rate band
If the value of an estate is below the current NRB of £325,000, there’s usually no tax to pay. Married couples and civil partners can have a joint allowance of £650,000, but any assets above these two figures come with a tax of 40%. HMRC has frozen the NRB, which was set in 2009, until April 2021 and therefore as assets continue to rise between now and 2021, people will continue to own estates that are worth more than the £325,000 limit. This means that they will be held liable for inheritance tax.
There can be exemptions for example, on the first death when the estate passes to a spouse/civil partner, there would usually be no tax to pay. Gifts to charity do not incur inheritance tax and if they exceed 10% of the value of your estate, it could reduce your inheritance tax rate from 40% to 36%.
The NRB and RNRB are transferable
As the heading says, both the NRB and the RNRB are transferable between married couples and civil partners. This means that the unused percentage of the RNRB or the NRB can be transferred from the estate of one spouse to the other and then claimed back upon the second death.
Multiple homes don’t qualify
In order to qualify for the RNRB relief, you can only elect one residential property. The only people who can elect the appropriate estate are the personal representatives of the estate. Buy-to-let properties, as well as any other properties that have never been their main home are excluded.
Property will be treated individually
Property is an area that will eat into the NRB, or in some cases, exceed it. However, families are aware of this and causes them to give or ‘gift’ the property to their children. This could reduce their liability to inheritance tax but, as a consequence, remove security and control of owning a home and could be considered as a gift with reservation. As a result of this, the new RNRB has been be introduced by the government and will be phased in over a four-year period, starting from the 2017/18 tax year. This will be available to everyone. Regardless of whether the child is step, foster, adopted or linear descendants upon death, the RNRB is only available when the main residence is passed over to children.
Nigel Smith, Director of Hawsons Wealth Management Limited, had this to say: “Inheritance Tax is a voluntary tax. You can plan to effectively reduce your inheritance tax payable upon death.”