Inheritance tax rules change in mere days – will your threshold rise?
Inheritance tax is levied on estates valued over £325,000, which is called the nil rate band. Estates valued lower than this amount will not face any charge.
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On top of the nil rate band, a “residence” nil rate band has also been recently introduced.
This residence nil rate band adds an additional £150,000 to the estates allowance, boosting the allowance to £475,000.
However, the nil rate band will only come into effect if the estate is passed on to children or grandchildren.
This includes step-children, adopted children, foster children but not nieces, nephews or siblings.
The residence nil rate band threshold will be rising from 6 April.
Within the next few days, the threshold will rise by £25,000 to £175,000.
This means that estates valued below £500,000 will not face any inheritance tax charge if they’re passed on to family.
Beyond 2021 the thresholds will rise in line with the consumer price index.
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To ensure the value of an estate is accurate, certain actions will need to be taken.
The basic calculation requires a person to:
- List out all the assets and work out their value at the date of death
- Deduct any debts and liabilities
The Money Advice Service recommend that families should keep records of how they worked out the value of the estate, such as estate agent valuations.
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It should be noted that an estate does not just include a property.
Other assets that are included in the calculation can include cash, jewellery and investments such as shares.
Estates that do have inheritance tax levied on them will pay 40 percent.
This 40 percent is only charged on the part of the estate that is above the threshold(s).
So, for example, an estate is worth £500,000 and the tax-free threshold is £325,000. The inheritance tax charged will be 40 percent of £175,000. This will be a hefty charge for many families but there are methods for reducing the rate.
It is possible to give certain “gifts” away in the years before death which may receive tapered relief lower than 40 percent. There are other reliefs available such as business and agricultural relief which can reduce the tax burden. On top of this, inheritance tax can be reduced to 36 percent if at least 10 percent of an estate is left to charity.
Inheritance tax can be a complicated aspect of estate planning as there are so many rules concerned with it.
Thankfully, the government provide an inheritance tax “reduced rate calculator” which can help with planning.
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