Plan for Inheritance Tax – maybe save money
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This may be less of an issue than it used to be but it hasn’t gone away. When drafting a will you may still need to consider whether there will be inheritance tax to pay and whether there is anything you can do about it.
Being “married” matters
Whether you leave a will or not it makes a difference if you are married or in a civil partnership. For convenience we’ll call the person you are married to or in a civil partnership with your “spouse/civil partner”. There are special rules that apply to spouse/civil partners which don’t apply to anyone else. So even if you have a “partner” e.g. someone you’ve lived with for years or have children with, they aren’t treated like a spouse/civil partner. Take a look at our intestacy rules advice to see other effects. As far as the law on inheritance tax is concerned partners are just like any other member of the public.
There is no inheritance tax on assets you leave to a spouse/civil partner. That applies whether they inherit under your will or the intestacy rules.
Partners do not receive any preferential treatment
Otherwise anyone can also leave up to a total of £325,000 (to one person or spread around many) without any tax being due. This known as the “nil rate band.” But if you leave more tax is due on the balance. E.g. if you leave £200,000 to your partner and £200,000 to your son there is tax to pay on £75,000.
Using two nil rate bands
Often someone will leave nearly everything they have to their spouse/civil partner. If the spouse/civil partner then dies, they can use up the unused percentage of that spouse/civil partner’s nil rate band. For example if a husband died in January 2000 he may have left his wife a house and investments and given his children £50,000. In 2000 the nil rate band was £231,000, therefore the £50,000 would represent approximately 21% of his nil rate band. There would then be 79% of the nil rate band applicable at the date of his wife’s death available on her death. If his wife died in January 2017 the remainder of his nil rate band (i.e. 79% of £325,000 being £256,750) is added to her own £325,000 nil rate band. Therefore she can leave her children up to £581,750 without inheritance tax being due.
House Allowance -2017
From 6 April 2017 there is a new inheritance tax allowance available when a residence is passed on death to a direct descendant. For 2017/18 the allowance is £100,000 and it will rise annually by £25,000 to £175,000 in 2020/21. However there are a number of positives and negatives to bear in mind.
- As with the spouse exemption if one spouse doesn’t use up their allowance when they die the balance is useable when their spouse dies.
- As long as the second spouse dies after 6 April 2017 it doesn’t matter when their first spouse died.
- The allowance will be available when a person downsizes or ceases to own a home on or after 8 July 2015.
- the person administering the estate needs to decide which qualifying property to nominate for the allowance.
- Only spouses can pass on any unused allowance.
- It only applies if the person inheriting is a direct descendant. That includes be a child (including a step-child, adopted child or foster child) of the deceased and their lineal descendants.
- It can’t be used for a property which was never a residence of the deceased, such as a buy-to-let property.
- It can’t be shared between properties.
- Property given in a trust may not qualify
- The general nil rate band isn’t set to rise so if you own cash not property you are at a disadvantage.
- If you leave a net estate of more than £2,000.000 the new allowance is reduced. Its reduced by £1 for each £2 over the £2,000.000 that you leave.
Inheritance Tax is 40%
All that we’ve said above shows that for many people inheritance tax is irrelevant. However for those with very substantial assets it is worth considering tax planning. After all paying tax at 40% can be very painful.
Where appropriate I can also recommend other advisors such as Accountants and Independent Financial Advisors whose expertise may be relevant in this area.
Probate Fee Rise
These are the fees paid to the government for the grant which allows an executor or admistrator to collect and distribute the deceased’s assets. For years probate fees have been a flat rate for estates over £5,000. £155 for solicitor applications and £215 for personal applications.
Kevin Moon– Private Client Solicitor – Partner