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What is Inheritance Tax and how much do I pay?

By Ravi Merhas – Head of Private Client Services

Inheritance tax (IHT) is a tax on the estate (the property, money and possessions) of someone who’s passed away.

How much you pay depends on the value of your estate – which is valued based on your assets (cash in the bank, investments, property or business, vehicles, pay-outs from life insurance policies) minus any debts and liabilities.

How much Inheritance Tax would need to be paid?

Importantly, there is normally no tax to pay if either:

• The value of you estate is below the £325,000 threshold
• You leave everything over the £325,000 threshold to your spouse, civil partner a charity or a community amateur sports club.

Your estate will however owe tax at 40% on anything above the £325,000 threshold when you die (or 36% if you leave at least 10% of the net value to a charity in your will) – excluding the ‘main residence’ allowance (see below).

How will the Inheritance Tax position change if I am passing my main residence to children?

The government announced in 2015 that when parents or grandparents pass on a main residence to a direct descendent (children, step-children and grandchildren) worth up to £1 million (£500,000 for singles) IHT would be scrapped.

The basic allowance of £325,000 remains unchanged. What has changed is the introduction of the ‘residence nil rate band’ (RNRB) commonly referred to as the ‘main residence’ band, which is an additional threshold you’ll receive on top of your existing allowance if you pass on a main residence. It was introduced in the 2017/18 tax year and has being phased in gradually, having reached the maximum allowance on the 6th April 2020 for £1m exemption for couples in the 2020/21 tax year.

The RNRB allowance has risen to £175,000 – meaning a total allowance of £500,000 per person passing on the main residence. In the 2020/21 tax year, everyone is allowed to leave an estate valued at up to £325,000 plus the ‘main residence’ band of £175,000 giving a total allowance of £500,000 per person.

For estates worth less than this, beneficiaries won’t pay inheritance tax. The amount is set by the Government and is called the nil-rate band, because it’s the amount you pay a ‘nil-rate’ of IHT on.

So for example, if you leave behind assets in 2020/21 worth £525,000 (assuming you have just one property), your estate pays nothing on the first £500,000, and 40% on the remaining £25,000 – a total of £10,000 in tax – if you’re not leaving anything to charity.

Am I exempt if i’m married?

When you die, assets left to your spouse or registered civil partner, provided they’re living in the UK, are exempt from inheritance tax. On top of this, your partner’s inheritance tax allowance rises by the proportion of your allowance that you didn’t use, meaning together a couple can currently leave £1,000,000 tax-free.

This can sound complicated, so below is an example:

Mr and Mrs Youngatheart have assets worth £1,000,000 between them. Mr Y dies first in 2020/21 so his £325,000 tax-free allowance is passed on, as well as his £175,000 ‘main residence allowance’. In total, this means Mrs Y has a £1,000,000 tax-free allowance: her allowance, plus her inherited allowance from her deceased husband.

How Barnes Harrild & Dyer Solicitors can help

Our Wills, Probate and Estate Planning department at Barnes Harrild & Dyer Solicitors at our Central London and Croydon offices, are experts in advising and assisting clients to arrange their estate planning via trusts and wills. Sensible planning can make all the difference in preserving your estate for your loved ones.

This area is generally quite complex and, as time is not of the essence with visa, conveyancing or court imposed deadlines, wills, trusts and estate planning often gets pushed over until it is sometimes too late to put in place the best estate plan during your lifetime.

Regarding any of the above you can contact me directly at ravi.merhas@bhdsolicitors.co.uk to arrange a consultation, or you can contact us via the blue contact us boxes above. Barnes Harrild & Dyer continue to provide full legal services during this COVID-19 pandemic.

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