Inheritance Tax Planning
As house prices continue to rise, more and more people are finding that their family will have to pay inheritance tax (IHT) on their Estate after they have passed away.
You will not have to pay IHT on all of your estate as there is a nil rate band in place which is the value of an estate that is not subject to inheritance tax in the UK. This nil Rate Band is currently set at £325,000.
This means that any value of your estate above £325,000 could be taxed at 40%.
So for a single person with an estate of £425,000 then the taxable estate could be £425,000 less the nil rate band of £325,000 = £100,000.
This £100,000 excess would be subject to IHT at 40%, resulting in HMRC being paid £40,000 IHT, often payable before probate can be granted, and funded by a bridging loan or using the executors own savings.
However, it is never as simple as that because as with any tax, there are always different rules, exemptions and tests.
There is also a new allowance that has been introduced called the residential nil Rate band (RNRB), and this allowance is expected to be £175,000 after 5th April 2020.
This is a separate allowance over and above the NRB and in some situations could result in a person having £500,000 IHT allowances. If that person was married and inherited everything from their spouse after they passed away, then it is possible for the surviving spouse to inherit their spouses unused allowance as well, resulting in a potential total allowance of £1,000,000.
Again, there are certain rules and restrictions that come into play that may result in the surviving spouse having less that the maximum total allowance.
However, given that inheritance tax is currently 40% of the estate above the nil rate band, taking steps to mitigate the level of IHT payable will not only simplify the administration of your estate for your executors, but it should significantly increase the value of the legacies you will leave to your family and friends.
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