Are You Affected by Inheritance Tax?

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The Inheritance Tax (IHT) collected by HMRC for the year June 2016 to May 2017 saw an increase of 9% on the previous year, rising to over £5 billion for the first time.

According to law firm Wilsons, this is attributed to rising property values and the freezing of the basic Inheritance Tax allowance, which has remained at £325,000 since the 2009/10 tax year.

It will be interesting to see how the new family home allowance (officially known as the main residence nil rate band) impacts on these figures. This relief was introduced in April 2017 and, according to HMRC, is intended to ‘reduce the burden of IHT for families by making it easier to pass on the family home to direct descendants for all but the largest estates.’

As well as this, there are other allowances which can reduce an individual’s exposure to inheritance tax and now, more than ever, it is important to assess how best to align your IHT position with your expectations for the future.

Green & Co have an Inheritance Tax and Care Home Review service that we run in conjunction with a local solicitors. If you’d like to discuss this service or any related matters please contact Green & Co.

Please note: This article is a commentary on general principles and should not be interpreted as advice for your specific situation.

Family Home Allowance – The New Inheritance Tax Relief

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Currently, Inheritance tax is paid if a person’s estate (their property, money and possessions) is over £325,000. This is known as the inheritance tax threshold. Any assets that are above this amount incur an Inheritance Tax charge of 40%. Married couples or civil partners are able to double their allowance up to £650,000 before tax is payable.

However, from April 2017, an additional “family home allowance” is being introduced for people owning a home. It will eventually be worth an extra £175,000 per person – meaning the tax free band can be up to £1m for couples. It can even be transferred between married couples and civil partners if one dies before it is introduced in 2017.

The existing £325,000 nil rate band is frozen at its current level until 2021.

In order to qualify for the family home allowance, the property must have been the main family home at some point and be left to one or more direct descendants, including children, step children, adopted children, foster children and even grandchildren. However, it will not include other family members such as nieces and nephews.

If there is more than one property in the estate, only one will qualify for the new allowance. If a home is sold or downsized any time from 8th July 2015, the family home allowance will still be allowable as long as assets of an equivalent value are passed to the descendants instead.

For estates with a net value of more than £2m, the family home nil rate band is withdrawn at £1 for every £2 over the £2m threshold.

Please note: This article is a commentary on general principles and should not be interpreted as advice for your specific situation.

Budget 2014 and 2014/15 Tax Tables

If you are interested in the tax allowances for 2014/15, please refer to our Tax Tables: Green & Co 2014/15 Tax Tables

If would like to  read our summary of the 2014 Budget, then please follow this link: Green & Co Budget Summary 2014

The main issues include:

Savings: Reform of ISAs. The current distinction between stocks and shares ISAs and cash ISAs will be simplified with the creation of the New ISA (NISA). The annual contribution limit is also increasing to £15,000, making it possible for a couple to save up to £30,000.

Annual Investment Allowance (AIA): If you are investing in plant and machinery for your business, the amount you can claim capital allowances on has doubled from £250,000 to £500,000. This will run from April 2014 to 31 December 2015.

EISs & VCTs: No change in the rules for EIS and VCTs as you can still claim 30% income tax relief on these investments.

Inheritance Tax (IHT): The IHT threshold will remain at £325,000 until 5 April 2018.

For more tips, refer to the ‘think ahead’ boxes of our guide.

Please contact us if you need more information on these changes, or any other matter.

Giving at Christmas – Inheritance Tax Allowances & Exemptions

Christmas is a time for giving…and most people are very happy if you give them money! However, it is worth remembering your allowances and exemptions for Inheritance Tax.

If your estate is worth more than the Inheritance Tax threshold – £325,000 for the 2013-14 tax year – there are some important Inheritance Tax exemptions that allow you to make gifts to others and not have to pay tax on them when you die:

Annual exemption

You can give away gifts worth up to £3,000 in total in each tax year and these gifts will be exempt from Inheritance Tax when you die. You can carry forward any unused part of the £3,000 exemption to the following year, but if you don’t use it in that year, the carried-over exemption expires.

In addition to the annual exemption there are other exemptions for certain types of gifts. These are explained below.

Small gifts

You can make small gifts up to the value of £250 to as many individuals as you like in any one tax year. However, you can’t give more than £250 and claim that the first £250 is a small gift. If you give an amount greater than £250 the exemption is lost altogether.

You also can’t use your small gifts allowance together with any other exemption when giving to the same person.

Regular gifts or payments that are part of your normal expenditure

Any regular gifts you make out of your after-tax income, not including your capital, are exempt from Inheritance Tax. These gifts will only qualify if you have enough income left after making them to maintain your normal lifestyle.

These include:

  • monthly or other regular payments to someone
  • regular gifts for Christmas and birthdays, or wedding/civil partnership anniversaries
  • regular premiums on a life insurance policy – for you or someone else

You can also make exempt maintenance payments to:

  • your husband, wife or civil partner
  • your ex-spouse or former civil partner
  • relatives who are dependent on you because of old age or infirmity
  • your children, including adopted children and step-children, who are under 18 or in full-time education

Exempt gifts

Some gifts made during your lifetime are exempt from Inheritance Tax because of the type of gift or the reason for making it:

Wedding gifts/civil partnership ceremony gifts

Wedding or civil partnership ceremony gifts are exempt from Inheritance Tax, subject to certain limits:

  • parents can each give cash or gifts worth £5,000
  • grandparents and great grandparents can each give cash or gifts worth £2,500
  • anyone else can give cash or gifts worth £1,000
  • You have to make the gift – or promise to make it – on, or shortly before, the date of the wedding or civil partnership ceremony. If the ceremony is called off and you still make the gift, or if you make the gift after the ceremony without having promised it first, this exemption won’t apply.

Please note: This article is a commentary on general principles and should not be interpreted as advice for your specific situation.

Article written by guest blogger, Andrew Tucker, Financial Planning Solutions Ltd