With the April 2017 inheritance tax changes, the picture is looking brighter for homeowners who wish to pass on the value of their property to direct descendants without incurring inheritance tax. In this article we look briefly at these changes and then consider some simple tips on how to avoid inheritance tax and, as this is not possible in all cases, how to reduce inheritance tax.
The latest set of inheritance tax changes came into play on April 6th 2017 and together with the sliding changes due between that date and 2020 are good news for both property owners and those expecting to inherit property.
In the UK there is a ‘nil-rate’ band below which no inheritance tax is charged on assets including property. Above this band, inheritance tax is charged at 40%. Prior to April 2017 this ‘nil-rate’ band was £325,000 per person, so a couple could leave assets of up to £650,000 before any inheritance tax would be paid.
The provision above remains but since April 6th 2017 it has been augmented by an additional ‘main residence’ band of £100,000 per person (increasing gradually until it reaches £175,000 in 2020). This band is only applicable if the property is the person’s main residence and they are bequeathing it to direct descendants (i.e. children, step-children or grandchildren).
When added together, by 2020 the original ‘nil-rate’ band of £325,000 and the new ‘main residence’ band of £175,000 will give a total inheritance tax allowance per person of £500,000.
The ‘main residence’ allowance applies for any property up to the value of £2 million. Above this value for every £2 over the £2 million level the allowance will be reduced by £1. This means that there will be no additional ‘main residence’ allowance for properties valued over £2,350,000.
It is important to remember that as well as property, for the purposes of avoiding inheritance tax, taxable assets include cash in the bank, payouts from life insurance policies, investments and any business you own. Unless you take the right steps, the value of all of these will be taken into account when inheritance tax is calculated on your estate.
Make sure you have a will
Writing a will is the one sure-fire way of making sure that your assets are distributed as you want them to be and not towards the taxman. If you die intestate (without a will) your estate will be divided up according to strict rules, which may mean the incurrence of otherwise avoidable inheritance tax.
Add a ‘deed of variation’ to your will
A ‘deed of variation’ will allow your beneficiaries to make changes to your will after your death. This can be a way of avoiding inheritance tax because it might mean that they can direct funds in another direction, for example into a trust, instead of paying inheritance tax. All beneficiaries of a will must agree to a change.
Keep a close eye on the value of your property and the ‘nil-rate’ and ‘main residence’ bands
In the years up to 2020 the value of the ‘main residence’ inheritance tax free band will increase so when you are thinking about how to avoid inheritance tax it is worth keeping careful track of your assets including the value of your property.
Gift assets to avoid inheritance tax
If you are giving to your civil partner or spouse there are no implications for inheritance tax as long as they live in the UK. You can give gifts of up to £3,000 a year without paying any inheritance tax (this annual exemption can be carried forward but only for one year). Above this, gifts of assets that occur at least 7 years before your death will not incur inheritance tax. You can also give a wedding gift of up to £5,000 depending on your relationship to a person, as well as payments to help with another person’s care or living costs.
Set up a trust to avoid inheritance tax
A trust is an agreement between three parties, the trustor (you), the trustee (someone you choose to manage the trust) and the beneficiary or beneficiaries who will benefit from the property held in the trust. Assets that are put into a trust that does not benefit you, your spouse or your children under 18 are exempt from all inheritance tax. Trusts can either be set up whilst you are living or be established in your will.
Take out life insurance
A life insurance policy will not have an impact on the amount of inheritance tax levied against your estate but it will help your beneficiaries to pay any tax that is required. This could, for example, mean that your children could avoid having to sell a property to pay inheritance tax. In order to guarantee that your life insurance payment won’t add to your inheritance tax bill, you need to make sure that it is paid into a trust on your death so that it doesn’t become part of your estate.
Leave something to charity
Leaving a proportion of your estate to charity is a good way to help a cause that you care about and may well help you with avoiding inheritance tax. If you leave 10% of your estate to charity, the inheritance tax on the proportion of your estate over the threshold will be calculated at 36% instead of 40%.
Perhaps the most important thing to remember when considering methods of avoiding inheritance tax is to start planning early. The best way in which to do this is to seek professional advice in particular with regard to the value of your property.
At Arlington Residential we develop nurturing, long-term relationships with our clients and are happy to offer property advice. Get in touch with the team at Arlington today and we will help you to find Central or North West London property solutions that entirely suit you and provide for your future needs.
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