As Benjamin Franklin once said, “In this world nothing can be said to be certain, except death and taxes”. In the UK, we have gone one better, combining the two.
We are all used to paying tax on our earnings and tax on everything we buy. Some of us might have sold something of ours at a profit and paid tax on the gain, but only a small, if growing, number of us pay inheritance tax.
In fact, strictly speaking, none of us do, as the tax is only payable by our estate once we are dead.
If you accumulate more than £325,000 in assets over the course of your life, society has decided decreed that 40% of the surplus should be taken by the government. Reasons for this vary, dependent on your political views, but Inheritance Tax (IHT) can be defined either as the state re-balancing the wealth of those in society for the greater good, or it’s just blatant pilfering of your pockets once you’ve passed on.
Either way, the government has decided that the level at which you should pay it is £325,000, or £650,000 as a married couple. Furthermore, where one spouse is left alone after the death of the other, the government allow that spouse to effectively delay tax payment until they too, have died.
In 2015, George Osborne introduced a measure aimed at reducing the impact of Inheritance Tax on relatives of the deceased where a home is left to them. The measures come into force in April 2017.
This measure introduces an additional nil-rate band when a residence is passed on death to a direct descendant.
This will be:
£100,000 in 2017 to 2018£125,000 in 2018 to 2019£150,000 in 2019 to 2020£175,000 in 2020 to 2021
It will then increase in line with Consumer Prices Index (CPI) from 2021 to 2022 onwards. Any unused nil-rate band will be able to be transferred to a surviving spouse or civil partner.
The additional nil-rate band will also be available when a person downsizes or ceases to own a home on or after 8 July 2015 and assets of an equivalent value, up to the value of the additional nil-rate band, are passed on death to direct descendants.
There will be a tapered withdrawal of the additional nil-rate band for estates with a net value of more than £2 million. This will be at a withdrawal rate of £1 for every £2 over this threshold.
The existing nil-rate band will remain at £325,000 from 2018 to 2019 until the end of 2020 to 2021.
The tax is particularly complicated and there are several allowances and exceptions. For a full picture we recommend you take professional advice and/or read the government’s own guidance on Inheritance Tax