The amount of inheritance tax (IHT) paid by bereaved families has broken the £5bn barrier for the first time. This is largely due to rising property values and the long freeze in the IHT threshold, and means that many more families are affected. IHT is charged at 40% on the portion of the deceased’s estate worth over £325,000. This threshold has been in place since 2009, and isn’t scheduled to be reviewed until April 2021.
Residential property accounts for over a third of a typical estate that pays IHT. Because IHT is usually collected six to 12 months after someone dies, the latest figures reflect the boom in house prices before the recent slowdown.
Family home allowance Tax receipts would have been even higher had it not been for the introduction of the residential nil-rate band from April. This allowance, commonly referred to as the ‘family home allowance’, is worth £100,000 per person in this tax year, and applies when passing on a main residence to direct descendants and is in addition to the £325,000 allowance per person. It will increase by £25,000 per year until it reaches £175,000 in April 2020. This will then mean that each person will have a £500,000 allowance, or £1m per couple. On the first death, any unused allowance will pass to the surviving spouse or civil partner.
However, this new allowance isn’t universally good news. Estates worth £2m will see the residential nil-rate band tapered, meaning they will lose £1 for every £2 over the threshold. So, based on the 2017-18 allowance, estates valued at or above £2.2m will not benefit from the extra allowance.
Getting the right advice
There are legitimate ways of reducing the likely effects of IHT, including making full use of annual and other gift allowances, so if you need advice, get in touch.
Tax treatment depends on individual circumstances. Tax treatment, rates and allowance are subject to change.
For further information on IHT please contact one of our advisers on 01793 881602 or download our free Estate Planning Key Guide: You and yours – Estate Planning
Our full range of Keyguides can be found here