FINANCE Inheritance tax Inheritance tax explained and why it might be changing By Ella Walker, PA Inheritance tax is something you don’t often have to grapple with until a death in the family. But grasping the basics can be financially savvy, especially as the autumn budget is expected to bring about some changes. “Inheritance tax is one of those areas that is always under the spotlight, and it seems to be a popular point of discussion at the moment,” says Reme Holland, financial planning partner at accountancy firm Albert Goodman.“We’ll see what happens in October, November time, but I would always say, don’t make any rash decisions. Seek advice first before you do anything.”
How does inheritance tax currently work?
“Every individual has a nil rate band of £325,000, which means you can have assets worth up to £325,000 and not be liable for any inheritance tax (IHT),” explains Holland. It’s only on assets that exceed this that you have to pay inheritance tax, which, as standard, is 40% over the threshold.
Are there any exemptions?
Yes, particularly if you’re married or in a civil partnership.“A spousal exemption means that a husband and wife [for instance] could leave everything to each other, and no inheritance tax would be due,” says Holland.“It would only be due on the second death, at which point both those allowances [of £325,000] could be combined.” Other exemptions include “business property relief and agricultural property relief if you’re in farms and estates” and for those leaving their estate to a charity or a community amateur sports club. “There is another exemption called the main residence nil rate band, which is a further £175,000 each for married couples,” adds Holland.“One of the conditions for having that extra allowance is the property has to be left to direct linear descendants, so children and grandchildren.”
What about gifts?
Gifting is where things get more complicated.“In most circumstances, there is no inheritance tax due on the value of gifts given seven or more years before you die. However, if you die within seven years of gifting money or another asset from your estate, then your loved ones may have to pay inheritance on the value of those gifts,” explains Claire Exley, head of financial advice and guidance at Nutmeg.“How much, will depend on when you gifted the asset and its value.” This is the inheritance tax relief taper.“If you die within three years of gifting money or assets, the IHT rate will be 40%, this rate decreases each year, eventually reaching 0% if you survive for seven years,” says Exley. There are rules about how much you can gift too – around £3,000 in a single tax year, with as many smaller gifts, up to £250 per person, also allowed. Birthday and Christmas presents are exempt.
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