INSIGHTS
We can take some comfort that the wheels of the business of Government are still turning in that it is standard practice for the update to Inheritance Tax thresholds and interest rates to take place at this time of year. However, the updates are largely a confirmation of what was expected. The NRB has stagnated since 2009, resulting in a regime which has failed to keep pace with inflation and rising property prices.
The rates and allowances in terms of IHT have been updated as follows:
• Nil Rate Band remains at £325,000
• Residence Nil Rate Band has increased to £175,000 from £150,000
• The interest rate for late payment of IHT has decreased from 2.75% to 2.60%
• The interest rate on repayments has remained the same since 29 September 2009 at 0.5%
With the many crucial decisions and changes to the law taking place to cope with the current crisis, it is unlikely that the type of sweeping reform put forward by the All Party Parliamentary Group on Inheritance Tax and Intergenerational Fairness (APPG) will be seen for some time to come.
With this in mind, what are the current rules in relation to Inheritance Tax?
What is Inheritance Tax and how is it applied?
IHT is a ‘wealth’ tax and has been applied since 1986. When someone dies leaving an estate exceeding the Nil Rate Band (NRB), IHT will be charged on the surplus above the NRB at the rate of 40%.
For a married couple, there is an exemption for assets which pass from one spouse to the other either during life or on death. Spouses are also able to make use of each other’s NRB on the death of the survivor meaning that £650,000 of their joint estate can pass free of IHT.
In recent years there have been various reforms to IHT, most notably, the introduction of an allowance known as the Residence Nil Rate Band (RNRB). Subject to certain conditions, RNRB allows individuals to leave their house to children or grandchildren free, or partially free, from IHT. The threshold allowance has increased incrementally since its introduction in April 2017 and has now reached its maximum of £175,000 as of April 2020.
Will Inheritance Tax change in the future?
IHT has frequently come under scrutiny and has been a focus of political differences since its controversial introduction. Whilst some individuals view IHT as a way of reversing austerity, many others view the tax as fundamentally unfair.
It is uncertain what changes are on the horizon for IHT and whilst you may think that IHT is not something you need to worry about, review of your circumstances and obtaining professional advice should be considered on an ongoing basis as early action can significantly reduce tax liability.
Can I avoid paying Inheritance Tax?
With careful lifetime planning it is possible to mitigate the tax which may become due on your estate.
As a starting point it is important to make a Will to ensure that your estate goes to the person, or people, you want to receive it. It also allows a person with a large estate to engage in IHT planning to cut the tax bill or avoid paying it altogether. Even if you have already prepared a Will, it is worth reviewing it to ensure you make the most of the tax allowances available.
Other estate planning options include making lifetime gifts, or placing money or property in trust. IHT reliefs are also available, including Agricultural Property Relief and Business Property Relief.
Get in touch – we’re here to help
You can be assured that the wheels of our business are still turning and if you would like to obtain estate planning advice tailored to your specific needs and circumstances, our experienced team of solicitors are on hand to help.
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