Financial Planning

Inheritance Tax In 2018: Big Changes You Need To Know About

Inheritance Tax In 2018: Big Changes You Need To Know About

Inheritance tax (IHT). It’s the tax that many people love to hate.

 

It’s quite controversial, and complicated to understand. Yet grasping the essentials – and how IHT affects you – goes a long way to benefitting your loved ones in the future.

 

In a nutshell, IHT is the tax levied on wealth transferred between family members. If the value of your wealth goes over a certain limit, you have to pay inheritance tax.

 

It’s quite lucrative for the UK government. Last year alone, over £5 billion was brought in to the government through IHT alone (up 13% on the year before).

 

Yet the system is in a state of flux. Recently, the Chancellor has written to the Office of Tax Simplification (OTS) to request a review of the current IHT system. They have responded, saying a report will be released in Autumn of this year.

 

So some big changes could be on their way. Some argue it could even potentially spell the end of inheritance tax, which is the route other countries have taken (e.g. Sweden in 2004, Norway in 2014).

 

Yet some important changes have already arrived.

 

The “Residence Nil Rate Band”

 

The IHT system got even more complicated last year, with the government’s introduction of the Residence Nil Rate Band (RNRB).

 

This gives you an extra “allowance” on top of the existing standard nil rate band. The latter (in 2018-2019) allows each person to pass on £325,000 tax-free to their descendants.

 

However, if your estate includes your home then you get an extra allowance (the RNRB). This amounted to £100,000 last year, but now has risen to £125,000.

 

What does this mean? In practical terms, it means that married couples and civil partners can potentially pass on £900,000 without paying tax. This is because each person in the couple gets their own allowance:

 

Husband’s allowance + Wife’s allowance
(£325,000 + £125,000) + (£325,000 + £125,000) = £900,000

 

If you or your spouse / civil partner die, then you can still inherit any allowance they haven’t yet used. However, beware that any wealth you both have which exceeds your personal allowance is liable to a 40% tax.

 

Future Trends

 

It’s also worth bearing in mind that the RNRB will increase next year, by £25,000 – taking the total RNRB allowance up to £150,000. This pattern of increasing by £25,000 will be continuing each tax year until 2020/21.

 

So in two years, you will be potentially be able to pass on half a million pounds (when you add the standard nil rate band and RNRB together). Married couples and civil partners might well be able to pass on £1m to their loved ones, tax-free.

 

Important note: You can only benefit from the RNRB if you are passing your wealth on to “direct descendants” (i.e. children, foster children, adopted children, step children, grandchildren etc.). So, if you intend to pass your estate on to your sister, for instance, you will not be able to claim the extra allowance from the RNRB.

 

What Else Is happening With Inheritance Tax?

 

As mentioned above, there could be some big ones coming this Autumn.

 

One area to be mindful regarding IHT concerns gift-giving. Currently, you can make gifts to charity of your spouse / civil partner without facing IHT. If you make gifts to anyone else, however, including children, then be careful.

 

Gifts made to such people can be taxed within 7 years of your death, if the gifts fail to meet certain conditions. For instance:

 

You can give up to £250 to someone else, without facing IHT. You can also give a maximum of £3,000 away each year without incurring IHT either.

 

This is one area of IHT that could face an overhaul later this year. We’ll just have to wait and see. For now, make sure your estate is as tax-efficient as possible by speaking to an independent financial adviser, who can help you plot the best financial course ahead.

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