Inheritance tax: What you need to know

Money
08 January 2018
The rules on inheritance tax can be difficult to understand, so here's a quick rundown.

Inheritance tax can be a tricky subject to navigate, but it's one that we all need to get our heads around in order to pass on as much of our property, savings and other assets to our loved ones as we can when we die.

Research carried out by WAY Investments and published by Moneywise shows that almost half of over-50s admit their knowledge of inheritance tax is patchy at best, and a quarter do not actually know whether they will have any inheritance tax liabilities upon their death.

This could leave their loved ones in a precarious position, potentially facing a large tax bill that could slash the value of the assets they inherit.

The rules on inheritance tax

At present, each individual can pass on £325,000 when they die without incurring any inheritance tax. If you are married or in a civil partnership, you can pass on your whole estate to your other half completely tax-free.

You can also pass on any unused tax allowance to your surviving spouse, giving them a total of £650,000 to pass on before any tax must be paid. If your combined assets are worth more than this, then anything above the nil rate band will attract tax at 40 per cent.

The new residence nil-rate band

To take into account the rapid rise in house prices in recent years, the Government has made some changes to the inheritance tax rules that mean you can now hand over even more of your estate free of tax.

The new residence nil-rate band is effectively an extra allowance on top of the £325,000 already provided. At present, it's an additional £100,000, although this will increase by another £25,000 per year between now and 2020 when it will stand at £175,000.

However, it only applies if your estate includes a property that you have lived in at some point during your lifetime, and providing you leave it to your direct descendants. These are biological, adopted or foster children, grandchildren, great-grandchildren and step-children.

If you want to leave your home to any other relatives, such as a sibling or a niece or nephew, the residence nil-rate band will not apply. It's also worth knowing that if you have more than one residential property, only one can be used against this new tax allowance.

By 2020, individuals will be able to pass on £500,000 worth of assets including a residential property, while couples will be able to hand over a combined £1 million to their loved ones without being liable for inheritance tax. The residence nil-rate band will continue to rise with inflation each year after 2020.

What else is included in your estate?

It seems that, when it comes to our understanding of inheritance tax, the confusion for many of us lies in knowing what is actually included in our estate, besides bricks and mortar and physical possessions. The WAY Investments research shows that a fifth of over-50s do not know that ISAs are liable for inheritance tax, for example. So what else do you need to take into account when calculating how much your estate is worth?

  • Property and land
  • Possessions such as vehicles, jewellery and furniture
  • Money in the bank
  • Investments such as shares and premium bonds
  • Pay-outs from life insurance policies
  • Jointly owned assets

Gifts that were given in the seven years prior to your death may also be liable for inheritance tax if they amount to £3,000 or more per year.

Once all of this is added up, you can take away the value of any debts and liabilities you have. These include your mortgage debts, any loans or overdrafts you have, as well as bills and funeral expenses.

Inheritance tax planning

Since so many over-50s have admitted to a lack of knowledge around inheritance tax, it's important to speak to someone who knows more about estate planning in order to minimise tax liabilities and ensure that loved ones are provided for as much as is possible.

There are a number of steps people can take to reduce their final tax bill. For example, assets can be placed into a trust. Of course, a trained adviser will be able to look at your own personal situation and decide which approach is best for you and your family.

Newsletter sign-up

© 2017 Axonn Media Ltd. All rights reserved. Any views and opinions expressed in news articles are not those of Just Retirement Limited, Just Retirement Money Limited or Partnership Life Assurance Company Limited. News supplied by Axonn Media.

Image credit: designer491 via iStock