Inheritance Tax has long been a controversial topic and last summer George Osborne, the then Chancellor, announced various changes. It is thought the changes are aimed at meeting the 2010 Conservative manifesto promise to increase the Inheritance Tax threshold to £1m, but without overtly saying this for fear of political ramifications. The changes are due to come into effect on 6 April 2017, and as we start to prep for the end of this tax year and the beginning of next, we thought it would be useful to take an overall look at Inheritance Tax.
Just what is Inheritance Tax?
At its base form, inheritance tax is fairly simple, it is a charge imposed by the government on a deceased person’s estate. It first started with a typical rate of tax as Estate Duty in 1914, changed to Capital Transfer Tax in 1975 and then finally to Inheritance Tax (or IHT) in 1986. However, with a fairly hefty rate of 40% it has always been a controversial topic. and recent governments have attempted to mitigate the controversy with the introduction of ‘nil band’ rates.
Nil Band Rates
For anyone who has had any dealings with Inheritance Tax, they will have encountered the phrase ‘nil band rate’. These were introduced in 2007 and currently stand at £325,000 for a single person. Inheritance Tax is then due on any amount over the nil band rate, so if your estate is valued at £350,000, Inheritance Tax would only be due on £25,000 of your estate. Since 2007, couples have also been able to transfer allowances, thereby ‘doubling up’, so a legally recognised couple could potentially have a nil band rate of £600,000.
This coming April will see the introduction of a new ‘residence nil band rate’. Totalling £100,000 per person, this can be passed on tax free but only to direct descendants and only from money tied up in your main residence. So when this new band comes into effect, a single person will have a potential tax free estate of £425,000 to pass on, and a couple £850,000. When the proposed rises are taken in effect, (£25,000 for the next three years) by the 2020/2021 tax year, up to £1 million could be passed on tax free. However, it is important to remember that the current individual nil band rate of £325,000 has not risen since its 2007 introduction due to a weak global economy, so these increases are very much proposed rather than certain.
The Seven Year Rule
It seems to be a widely known fact that an individual can gift money during their lifetime, and if they survive for a further seven years, then no Inheritance Tax is due. However, did you know that the full 40% is only due if you within three years of gifting? After that, it’s charged on a sliding scale known as ‘taper relief’, so 3-4 years sees a rate of 34%, 4-5 years a rate of 24%, 5-6 years 16%, 6-7 years 8% and then at 7 years after the gift becomes exempt from tax.
We hope that you’ve found our summary of Inheritance Tax useful. As ever, please do get in touch with any queries that you might have about Inheritance Tax.