The Inheritance Tax Rules
Currently, there is a nil-rate band of £325,000 before an Estate is liable to the 40% inheritance tax on the value of the Estate above this tax-free level. Married couples can transfer their tax-free allowance to their partner, which means the 40% inheritance tax is only payable on the value of the Estate above £750,000.
New legislation is currently being written for implementation from the 6th April 2017 that is being devised to reduce the burden of Inheritance Tax on families who will be able to inherit the family home via direct descent. Little is known at this stage as to what the full legislation will entail. Unless there is a change in your circumstances or wishes, it would not be worth updating your Will until all the new legislation is known.
What Changes Are Known
The current nil-rate band of £325,000 will remain in place. The known legislative changes are in relation to the main or primary residence of the deceased. There will be a new nil-rate band on the main residence that will eventually reach £175,000 per primary home of an Estate over four years;
* In 2017 – 2018 the value will be £100,000
* In 2018 – 2019 the value will be £125,000
* In 2019 – 2020 the value will be £150,000
* In 2020 – 2021 the value will be £175,000
The conditions of this new residence nil-rate band include the transferability between spouse or civil partners, on the residential property, that in all likelihood will actually be the principal family home. The other condition is, that the nil-rate band for the home will only apply to direct lineal descendants inheriting the home. Children, including step-children, adopted children or foster children or their own children are considered lineal descendants.
What Inheritance Tax Means To Your Beneficiaries
If your Estate, which is comprised of any property, land, investments, monies, jewellery, artworks and vehicles, is worth over £325,000 then your beneficiaries will be expected to pay 40% inheritance tax on the value over the nil-rate band. This figure can be reduced to 36% if a minimum of 10% of your assets is left to charity. It is worth noting that gifts made in the seven years prior to your death may also be included in the total value of your Estate.
The chances are, that you have worked hard in your life to build up your Estate, and the last thing you want to do is burden your loved ones with a hefty bill due to inheriting your hard earned assets. Therefore it is a good idea to have a good grasp on the value of your property and possessions and be proactive in planning your inheritance if you know that the value will be above the tax-free threshold, in order to reduce or eliminate any liability for your family.
Inheritance Tax Planning
Once you have a clear understanding of your Estate and what it entails, you will be in a better position to be able to plan. Even though the married or civil partners have benefited since October 2007, from the inheritance of their deceased partner’s tax-free portion, it is still a good idea to use the services of dedicated Tax-Specialists and Financial Planners to ensure your estate is left in its best financial position possible. It is even more important to consider the detailed planning of your estate if your partner is not recognised by marriage or civil union, the last thing you would want is for your loved one is to miss out on the favourable options available to recognised partners.
With careful planning, you can optimise your loved one’s inheritance of your Estate in a number of ways. Gifts in the form of investments can be one avenue, especially if you follow the advice of financial advisors who can give you expert information on your tax-free investment options. Another choice is to use tax-efficient trusts in order to set-up your Estate in advance for your beneficiaries. Again the best people to help you with planning trusts would be tax planning experts.
Making use of tax planning experts ensures you have access to their dedicated wealth of knowledge and experience. You can rest assured that you will be provided with the most up-to-date guidance to produce the most efficient form of savings possible, which in turn promises the healthiest and most tax-efficient financial position for your estate.