Important facts about inheritance tax

Inheritance tax is charged on the value of a person’s estate at the time of their death. The tax is charged at 40% over the tax free threshold which is currently £325,000. In 2013/2014 the tax raised £3.4 billion; receipts are forecast to be £4.2 billion in 2015/16. It is estimated that the tax was paid on 28,000 estates in 2013/14 representing only 4.9% of all deaths.

When calculating the taxable value of a person’s estate transfers made out of their estate within 7 years of their death are included although there are some exemptions.

Since 2012/13 an estate may be liable to a lower 36% tax rate if 10% of the net estate is left to charity.

In 2007 the Labour government introduced a new transferable allowance for inheritance tax for married couples or those in a civil partnership (spouses). By way of example if on the first death none of the original tax free threshold was used because the whole estate passed to a surviving spouse then when the surviving spouse died he or she would have his or her own tax free threshold plus that of the deceased spouse meaning that the estate would only pay inheritance tax on assets worth more than £650,000.

It is estimated that the above change cost the government about £1 billion in lost inheritance tax.

In their first budget in July of this year the Conservative government promised to increase the inheritance tax threshold further for married couples and those in a civil partnership to £1,000,000 by 2020 with a new transferable main residence allowance of £175,000. This will only apply on transfers on death of a main residence to a direct descendant. A direct descendant is a child (including a step-child, adopted child or foster child), grandchild, great grandchild and so on. The additional band will be withdrawn in stages for an estate worth more than £2,000,000.

If someone downsizes or ceases to own a home after 8 July 2015 but before they die the additional band may still be claimed on assets of an equivalent value if passed on death to a direct descendant.

The existing tax free threshold of £325,000 is frozen until April 2020. The additional main residence band will be introduced in April 2017 and for the tax year 2017 to 2018 will be £100,000 rising by £25,000 each tax year until April 2020 when it will be £175,000.

This creates an effective £500,000 inheritance tax threshold for one estate in 2020 and of £1,000,000 for estates of married couples or civil partners.

Inheritance tax is a complex matter and is set to become more complex next year. It is important that you consult a solicitor before making a will or dealing with the administration of an estate. If you need any help with these matters then contact on 01425 621515 or on 01425 673994 or on 01425 279222