Inheritance tax (IHT) is a tax that is levied on the estates of individuals upon their death It is a tax that is often overlooked by many individuals, but it can have a significant impact on the value of the estate that is passed on to loved ones In recent years, property values have soared, leading to an increase in the amount of IHT that is being collected by the government Therefore, it is important for property owners to understand how IHT works and how it can affect their heirs.
IHT is currently payable on estates with a total value above £325,000 This threshold is known as the nil-rate band, and any assets above this amount are subject to a 40% tax rate For married couples and civil partners, the threshold can be transferred between them, effectively doubling the amount that can be passed on tax-free to £650,000 This is known as the residence nil-rate band, which was introduced in April 2017 to address the issue of rising property values.
The residence nil-rate band allows individuals to pass on an additional £175,000 worth of property to their direct descendants tax-free This amount is set to increase to £175,000 in the 2020/21 tax year, providing a total threshold of £500,000 for individuals and £1 million for married couples or civil partners However, it is important to note that this relief is only available on property that is left to direct descendants, such as children or grandchildren.
When calculating the value of an estate for IHT purposes, property owners must include the value of their home, second homes or buy-to-let properties, and any other real estate that they own They must also take into account any mortgages or debts secured against these properties, as these can reduce the value of the estate that is subject to tax iht on property. In addition, any gifts made within seven years of death may also be subject to IHT, so it is important to seek advice from a tax professional when planning to pass on property to loved ones.
There are several strategies that property owners can use to reduce the amount of IHT that is payable on their estate One option is to downsize to a smaller property, which may help to reduce the overall value of the estate below the threshold Another option is to gift property to loved ones during their lifetime, as gifts are generally exempt from IHT as long as the individual survives for seven years after making the gift However, it is important to note that there may be other tax implications associated with gifting property, so it is advisable to seek professional advice before taking this step.
In some cases, property owners may be eligible for other reliefs or exemptions that can reduce the amount of IHT that is payable on their estate For example, business property relief may be available on properties that are used for business purposes, while agricultural property relief may be available on farms or land that is used for agricultural purposes It is important to seek advice from a tax professional to determine whether these reliefs apply to your specific situation.
Overall, it is essential for property owners to have a clear understanding of how IHT works and how it can impact the value of their estate By taking proactive steps to reduce the amount of IHT that is payable, individuals can ensure that more of their hard-earned assets are passed on to their loved ones Seeking advice from a tax professional is key to developing an effective estate plan that minimizes the impact of IHT on property and maximizes the value of the estate that is passed on to heirs.