One of the most common myths concerning Inheritance Tax (IHT) is that it is only paid on the estates of very rich families. However, with property prices remaining high, many more families are facing the prospect of their estates falling within the IHT threshold on their death.
The nil-rate band stands at £325,000 and will remain at that figure until 2021. Some people are under the impression that this has been increased to £1m for couples, the figure often given in newspaper headlines. However, that is not the case yet, and it won’t apply in every instance. The new additional nil-rate band covering main residences will initially be worth £100,000 per individual from April 2017 and be worth £175,000 when fully implemented in 2020. It only applies to family homes left to direct descendants. It doesn’t include properties left to nephews and nieces and excludes second homes and buy-to-let properties. See here for more details.
A Will is essential
Another myth that needs busting is that married couples or civil partners don’t need to worry about IHT as their partners will inherit everything free of IHT. However, without a valid Will in place, and under the rules of intestacy, if there are children a portion of the estate will go to them and could trigger an IHT charge that could have been avoided with a Will in place.
Whilst there are annual exemptions, for example you can make gifts of up to £3,000, you can’t simply give all your money away to avoid IHT. Making larger gifts of money or property is subject to the ‘seven-year rule’. This means that you need to survive for seven years from doing so for the gift to fall outside your taxable estate. If you die within seven years, the tax charge is tapered down, but there could still be a charge to IHT.
IHT is a complex subject, so professional help is advised.
Tax treatment depends on individual circumstances. Tax treatment rates and allowances are subject to change.