Michael Lansdell from Lansdell & Rose Chartered Accountants talks this month about Inheritance Tax planning.
In the 2015 Summer Budget, a big change to Inheritance Tax (IHT) was announced that will start to take effect from 2017, but certainly, like with anything tax related, it pays to know about now, so correct tax planning can be carried out. How will this change affect you?
The views expressed in this article are specifically those of Lansdell & Rose Accountants.
The current IHT set up
The IHT threshold has been frozen since 2009, set at £325,000 per person and £650,000 for married couples and civil partnerships. Tax is applied at 40 percent to the value of all assets above this level.
Everything of value is taxed under IHT when you die, including:
- Your home
- Your jewellery
- Your savings and investments
- Your works of art
- Your cars
- Any other properties or land, even if they are overseas
Effective tax planning can save your loved ones thousands in unnecessary tax once you have died so it pays to know now how you can reduce this tax later.
IHT can affect even those with moderate wealth
One upon a time, IHT used to only affect the wealthy, however, with property prices shooting upwards, particularly in areas such as London and the South East, it doesn’t take much now for even those with moderate wealth to reach the tax threshold.
The government have recognised this and subsequently their latest change to IHT legislation takes into account the growing wealth of families today and they are, it appears, attempting to keep the tax charge in line.
The “family home allowance”
The government have pledged a further allowance to accompany the £325,000 tax free IHT threshold, which will directly relate to family homes.
The allowance will be introduced on a staged approach, starting on 6 April 2017 with £100,000 and working up to £175,000 by 2020.
Overall, this means a tax-free allowance of £500,000 per individual and £1 million for a married couple or civil partnership, including a family home, by the year 2020.
An additional rule has been introduced also, to encourage pensioners to pass-on larger properties to growing families. Those who downsize their property whilst still alive will be entitled to claim an IHT “credit”.
How much IHT can I expect to pay?
The table below shows the amount of IHT on the various estate value using today’s thresholds and once the “family home allowance” is in full operation in 2020.
Value of family home | Value of other assets | Value of the estate | IHT liability now (INDIVIDUAL) | IHT liability from April 2020 (INDIVIDUAL) | IHT liability now (COUPLE) | IHT liability from April 2020 (COUPLE) |
---|---|---|---|---|---|---|
£175,000 | £175,000 | £350,000 | Nil | Nil | Nil | Nil |
£200,00 | £300,000 | £500,000 | £70,000 | Nil | Nil | Nil |
£250,000 | £400,000 | £650,000 | £130,000 | £60,000 | Nil | Nil |
£400,000 | £600,000 | £1,000,000 | £270,000 | £200,000 | £140,000 | Nil |
£750,000 | £750,000 | £1,500,000 | £470,000 | £400,000 | £340,000 | £200,000 |
£1,000,000 | £1,000,000 | £2,000,000 | £670,000 | £600,000 | £540,000 | £400,000 |
As you can see there are considerable savings for those with family property.
The additional allowance is expected to be gradually tapered off for properties in excess of £2 million.
Gifts and transfers – the 7 year rule
There is a lot of compliance factored-in around IHT, particularly involving gifts and transfers.
If a “gift” is made, say to children or other family, the “gifter” needs tosurvive for seven years for the money to not be counted in their estate for IHT. This rule has been around a while now and nothing has changed as such, however, these “potentially exempt transfers” (PETS) remain an essential part of IHT planning, particular for those with large estates.
Gifts to husbands or wives and civil partners are exempt from IHT, although the IHT will eventually become due when the surviving partners dies, if the estate falls above the married couple’s taxable threshold, i.e. 15/16 £650,000.
What about my dental or medical business?
If a doctor or dentist still owns their own private practice upon death, the value of the business for a sole trader, or shares in the business, if it’s a limited company, qualify for Business Property Relief and can, in fact, escape the IHT.
For more information about this, Landsell & Rose specialist accountants and tax advisers can help.
Lansdell & Rose are specialist medical and dental accountants with a key focus on tax planning for healthcare professionals.
Contact Michael today for bespoke tax advice – 020 7376 9333
Read more tax saving tips from Michael
- 7 last minute tax saving tips for 2016
- How the new dividend rules affect you
- Buy-to-let investors face cuts in tax relief
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