Losing a loved one is a devastating time, and even more so when inheritance tax (IHT) takes away a large part of the estate left behind for family members and friends. More and more people are being impacted by IHT, and as a result, our experts believe it is now more important than ever to have a plan in place.
Once the total value of estate after debts are paid is calculated, the remaining amount is subject to IHT. Although there is a tax-free allowance of £325,000, known as the nil rate band (NRB), anything above this figure is subject to 40% tax. This figure has remained the same for many years now, resulting in a sharp increase of IHT collected over the last few years. The tax year ending April 2019 saw a £200 million increase on the previous year alone.
In 2017, the government took steps towards resolving this steady increase, and introduced the residence nil rate band (RNRB). As long as you own or co-own a property and have resided within it at some point in your life, the value of £150,000 will not incur IHT when passed down to a direct descendant, such as a child or grandchild. This is set to increase to £175,000 in 2020/21.
Despite introducing extra allowances, the frozen NRB and limited use of RNRB to children and grandchildren means that the amount of IHT collected will continue to increase, especially with rising property prices and more middle class families falling into the tax-paying threshold.
If the estate is left to a spouse, then spousal exemptions also apply. This allows a spouse to inherit ownership of various assets without incurring IHT, as well as inheriting any unused NRB and RNRB. This leaves direct descendants a potential tax-free allowance of £1million.
The Private Client team here at Fodens can help work with you to help you understand the complexities of inheritance tax and to understand how to plan for the succession of your estate in the most tax-efficient way. They will make sure as much as your hard-earned money and property passes to those you leave behind.
Our team of approachable and dedicated experts are always on hand to help guide you through the options available. Whether this be through a Will or a trust, we can help find the best plan that makes the most of your estate.
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