What is Inheritance Tax and IHT Relief, and Do I Qualify?

What is Inheritance Tax and IHT Relief, and Do I Qualify?
What is Inheritance Tax and IHT Relief, and Do I Qualify?

Inheritance tax has always been a controversial talking point, not least because it essentially involves the double taxation of earned income. Whilst various governments have pledged to remove inheritance tax altogether, most have settled for introducing more stringent thresholds and offering tax relief to those with smaller estates.

However, rising property values have continued to drag thousands of people into the IHT net, leading to a record £5.2 billion haul for HMRC in 2017/18.

In this post, we’ll explore IHT further, whilst asking whether or not you’ll be required to pay this in connection with your estate in the event of your death?

What is Inheritance Tax?

In the event of your death, your estate (which includes various asset classes such as real estate, savings and material possessions) may be subject to IHT.

The current threshold is fixed at £325,000, and if the total value of your estate exceeds this amount you’ll be required to pay IHT at a flat rate of 40%.

This rate is called the nil-band, and it’s currently secured by legislation until the year 2021. Whilst the legislation may be revised after this point, however, it’s unlikely that the government will increase the tax rate beyond the 40% mark.

Fortunately, pension plans don’t currently count towards your estate, so this is not considered when calculating whether you’re liable to pay IHT or not.

IHT Relief – When Don’t you Pay?

Fortunately, there are exemptions to paying IHT on your estate, and not only for those whose total assets are worth less than the £325,000 threshold.

For example, if you plan to leave your entire estate to your spouse or civil partner, there will be no requirement to pay tax at all. The same principle applies if your leave the whole of your estate to charity, so it’s important to keep this in mind when planning your financial legacy.

Interestingly, an additional allowance was also introduced in 2017, affording home-owners an additional £125,000 if they’re passing their house onto children or grandchildren. This means that you can currently pass on an estate worth £475,000 tax free, creating a potentially critical loophole for those who want to provide for their dependents after their death.

If you own a business and would like to pass this down to your children, you may also be able to benefit from a government-introduced measure known as business relief (BR).

Used by service providers like Downing to help clients mitigate their IHT requirements, this allows businesses to be passed on either tax free or at a reduced rate in some instances.

This legislation has also been extended to include investors with shares in qualifying firms, so long as the stock in question is in unlisted companies that are based in the UK. The business relief qualifying shares must also be held for at least two years at the time of death, otherwise the tax break won’t be applied.

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