The number of families having to pay inheritance tax (IHT) has fallen for the first time since 2009, according to the latest figures.
Inheritance tax is set at 40% and becomes payable once the tax-free threshold of £325,000 has been passed. There is no tax liability if a person’s estate passes directly to their spouse. This exemption does not apply to their children.
HM Revenue & Customs says that 24,200 people paid IHT in 2017-18, the most recent figures available. That’s a fall of 14% from 2016/17.
A report in the Daily Telegraph adds that the total revenue from the death duty fell from the record £5.4bn in 2018/19 to £5.2bn in 2019-20 – the first time the tax revenue has gone down for more than 10 years.
The fall is mainly due to the introduction of the residence nil rate band, sometimes referred to as the family home allowance, which was introduced in 2017.
The government at the time recognised that more and more families are being caught by inheritance tax and introduced an additional main residence allowance of £125,000. It came into effect in April 2017 and only applies to a person’s home, not the rest of their estate. It was set to rise gradually to £175,000 by this year.
When added to the £325,000 nil-rate band for inheritance tax, this provides a combined tax-free band of £500,000. Married couples can combine their allowances. When one spouse dies, and their share of the estate is passed on to their spouse the combined tax-free band of £500,000.00 is available to apply to the surviving spouse’s estate in the future.
This means that a married couple could have a combined allowance of £1m.
There are also other steps people can take to reduce the burden.
One helpful way to pass money on without inheritance tax implications is to adopt the ‘little and often’ approach. This allows you to give away £3,000 per year tax free. It’s a useful way to give money to your children without them running the risk of having to pay tax on it when you die.
There is also the ‘seven-year gift rule’ which allows a person to give money or assets of unlimited value.
These are just some of the ways you could reduce inheritance tax liability. A little planning now could save your families thousands of pounds in the future.
Please contact us if you would like more information about the issues raised in this article or any aspect of inheritance tax planning.