According to reports, the Government is considering including a proposal in the next Conservative manifesto for Inheritance Tax to be abolished, which has support from several MPs.
Inheritance tax is a big revenue stream for the Government with £6.1bn in receipts in the 2021/22 tax year and a 15% increase in the first half of 2022/23.
Many have argued that abolishing the current Inheritance Tax system during a cost-of-living crisis shouldn’t be a priority for the Government. Others have suggested that an overhaul of Inheritance Tax would be more sensible in the current climate.
Below, we have provided some guidance on Inheritance Tax and outlined the current rules in relation to it.
What is Inheritance Tax?
Inheritance Tax is a tax on your estate when you die, and is also sometimes payable on Trusts or gifts made during your lifetime. This includes the total of everything you own and a share of anything you own jointly.
Your ‘estate’ is basically the things that belong to you or that you own a share in, such as:
- Property
- Investments
- Insurance
- Pension payments
- Assets like cars, jewellery, or furniture
- Gifts you have made in the past seven years or that you still benefit from are included too, e.g. a house you have gifted but still live in. As are assets held in a Trust from which you receive a personal benefit
If you own assets jointly, your share of their value is included in your estate. Due to property inflation, many more people are now hit by Inheritance Tax.
Who doesn’t pay Inheritance Tax?
- Spouses and civil partners – Transfers of assets between spouses and civil partners are typically exempt from Inheritance Tax. This means that if you leave your estate to your spouse or civil partner, there is usually no Inheritance Tax liability.
- Charitable donations – If you leave a certain portion of your estate to a registered charity, that portion might be exempt from Inheritance Tax.
- Lifetime gifts to certain individuals and entities – Small gifts to individuals (up to a certain value per year) and gifts to political parties, national museums, universities, and community amateur sports clubs are usually exempt from Inheritance Tax.
- Agricultural and business property – In some cases, if your estate includes agricultural land or business property, there might be relief or exemptions from Inheritance Tax to prevent the breakup or sale of these assets.
- Gifts made more than seven years before death – If you give away your assets and survive for at least seven years after making the gift, it is usually not counted as part of your estate for Inheritance Tax purposes.
- Certain Trusts – Some types of Trusts might be exempt from Inheritance Tax, but this depends on the specific terms and conditions of the Trust and the relationship between the settlor, trustees, and beneficiaries.
There are various other situations and scenarios that might lead to exemptions or relief from Inheritance Tax, such as certain types of Government service-related deaths, armed forces personnel deaths, etc.
How much Inheritance Tax could my estate pay?
Every individual has a tax-free allowance to give away on their death, which is known as your Nil Rate Band allowance. For an individual, the allowance is £325,000 and for a couple, it is £650,000.
There is also an additional allowance called the Residential Nil Rate Band which can be claimed in certain circumstances. For example, when a parent leaves a child or lineal descendant a property outright. The Residential Nil Rate Band could provide a further tax-free allowance of £175,000 for an individual, or £350,000 for a couple. This allowance is capped at the value of the property.
Inheritance Tax will be paid if the estate exceeds the available Inheritance Tax thresholds and is not being inherited wholly by spouses or charities. The Inheritance Tax rate is 40% on the amount which exceeds the available allowances.
How can we help?
Heidi Van Rooyen is an Associate in our Wills, Trusts and Probate team, specialising in Inheritance Tax advice, Wills, administration of estates, Grants of Probate and Powers of Attorney.
With the next UK election to be held no later than January 2025, any change to the Inheritance Tax laws is likely to be a few years away. In the meantime, if you require any advice on Inheritance Tax, please do not hesitate to contact Heidi or another member of the team in Derby, Leicester or Nottingham on 0800 024 1976 or via our online form.
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