Rising property prices is causing increasing numbers of people to be hit by Inheritance Tax (IHT).
The nil rate band is currently £325,000 per person or up to £650,000 for a married couple or civil partners. If you are married or in a civil partnership your partner’s unused allowance can be transferred to you on their death.
If you are passing your home to your descendants, you may receive an additional IHT allowance of £150,000 or £300,000 for a couple (increasing to £175,000 per person in the 2020/21 tax year).
The residence nil-rate band is an extra property allowance that allows you to leave the allowable value in your home to direct descendants tax-free.
However, if you don’t have children (including step-children) or grandchildren you will not benefit from this allowance. Neither will you qualify if your joint estate is worth more than £2.6m. Certain trusts in wills also fail to qualify for the relief so it is worth reviewing your existing will if you have one.
These might seem like large sums of money but with the average UK house price standing at over £225,000 and in London at £472,000, it’s easy to see how more and more people are falling into the IHT trap.
There are, however, steps that you can take to protect your estate and reduce the amount of inheritance tax that it is exposed to.
Options include making gifts out of income, taking out life insurance to cover liability for IHT or putting assets into a trust so that they don’t form part of your estate.
Whichever option you consider, there are two things that you must do:
- Make a will – this is the cornerstone of estate planning. Having a will ensures your estate will be inherited by people of your choosing and make sure the available allowances are captured. Without a will your estate will be distributed according to the rules of intestacy and could be exposed to inheritance tax that could otherwise be avoided.
- Get expert advice – estate planning is unique to each person’s circumstances, so it is essential that you get professional advice to make sure you are able to make an informed decision about the options available to you to protect your assets.