Inheritance Tax

Inheritance tax is a topic that concerns many people. Here is a look at how inheritance tax is affected by this year’s budget along with everything else you might find helpful.

Will Inheritance Tax Change In 2021?

The Government is set to introduce legislation in Finance Bill 2021 so that the inheritance tax nil-rate bands will remain at existing levels until April 2026.

There are currently two tax-free allowances for inheritance.

  • Each individual has a tax-free allowance – the ‘nil-rate band’ – of £325,000.
  • If a person gives away a property to a direct descendant (such as their children or grandchildren) there is an additional allowance called ‘the residence nil-rate band’ which is currently £175,000.
    • The residence nil-rate band was due to rise with inflation in April 2021, but both thresholds have been frozen until 2026.
    • It still means, however, that married couples and civil partners can give away up to £1m free of inheritance tax.

So the nil-rate band will continue at £325,000, the residence nil-rate band will continue at £175,000, and the residence nil-rate band taper will continue to start at £2m.

This means qualifying estates can continue to pass on up to £500,000 and the qualifying estate of a surviving spouse or civil partner can continue to pass on up to £1m without an inheritance tax liability.

This will have effect from 6 April 2021 to 5 April 2026.

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Inheritance Tax In More Detail

When you die, assets left to your spouse/civil partner, provided they live in the UK, are exempt from inheritance tax. Furthermore, your partner’s inheritance tax allowance will increase by the amount that you didn’t use, meaning together a married couple or a civil partnership can leave £900,000 without it being taxed.

There are other instances in which inheritance tax is not charged.

  • Some people in what are considered ‘risky’ roles are exempt from paying inheritance tax if their death occurs during active service. These roles include the armed forces personnel, police, firefighters and paramedics, plus humanitarian aid workers.
  • The exemption also applies if a person who was injured on active service has their death hastened by the injury, even if they’re no longer in active service.
  • In other circumstances, there will usually be nothing to pay if the estate is valued below £325,000 or it is worth more that £325,000 but you leave it to a charity or a community amateur sports club.

Other things to be aware of:

  • If the estate is valued below £325,000, you must still report to HMRC
  • If you give your home to your children as a gift (including adopted, foster or stepchildren) or grandchildren the threshold increases to £450,000
  • If you are married or in a civil partnership and your estate is worth less than whichever threshold applies to you, any unused threshold may be added to your spouses threshold. Their threshold can be raised to as much as £900,000
  • The Inheritance Tax rate of 40% only applies to the proportion of your estate above the relevant threshold.

Inheritance Tax And Gifts

Some high value gifts you make while you’re alive could possibly be taxed after your death, depending on when you gave the gift. There’s also no Inheritance Tax to pay on gifts between spouses or civil partners whenever they may have occurred, however, gifts to other people will most likely count towards the value of your estate. Essentially, what this means is that Inheritance tax will be charged if you give away more than £325,000 in the 7 years before your death.

£3,000 worth of gifts can be given away each tax year (6 April to 5 April) without being considered as part of your estate. This is called your ‘annual exemption’. Any unused annual exemption can be carried forward to the next year, a rollover so to speak – but only for one year.

Each tax year, you can also give away:

  • Wedding/civil ceremony gifts of up to £1,000 per person. £2,500 can be given to a grandchild or great-grandchild, £5,000 for a child
  • Christmas or birthday presents providing this does not affect your standard of living
  • Contributions towards another person’s living costs; child who is a student, carers for an elderly relative
  • Gifts to charities and political parties
    • If you leave 10% or more of the ‘net value’ of your estate to charity, the rate of Inheritance Tax reduces to 36% on certain assets.

More than one of these exemptions can be used towards the same person.

If you make large gifts, the beneficiaries could take out life insurance against the potential impending inheritance tax bill. Most gifts into trust are now subject to inheritance tax even if made during your lifetime and you would need specialist advice in order to try and navigate your way around this..

Smaller gifts of up to £250 per person can be given freely throughout the year as long as you have not used any other exemption on the same person.

Gifts made 3 to 7 years before your death are taxed on a sliding scale known as ‘taper relief’.‘Taper relief’ might mean the Inheritance Tax charged on the gift is less than 40%.

Business Relief

Business Relief enables certain assets to be exempt from Inheritance Tax or with a reduced bill at least. All it means is that ownership of or shares in a business is included in the estate for Inheritance Tax purposes.

You can get 100% Business Relief on a business or interest in a business or shares in an unlisted company.

You can get 50% Business Relief on:

  • Shares in more than 50% of a listed company
  • Land, buildings or machinery used in a business the deceased were a partner in or controlled
  • Land, buildings or machinery of the business, held in a trust benefiting the deceased

The deceased must have owned the business or the assets for at least 2 years before they died for business relief to apply.

Who Pays Inheritance Tax?

Funds from the estate of the deceased are used to pay Inheritance Tax. This is overseen by the ‘executor’ of the will, providing there is one. Beneficiaries are not normally liable to pay tax on things they inherit, however, there may be other taxes to pay.

Our will writing service can advise you on matters including avoiding paying unnecessary inheritance tax and other Estate Planning Solutions.

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