In the 2015 budget, the UK government announced that the inheritance tax limit will be gradually altered from 2017 to 2020. Prestige Tax and Trust Services asks; how will inheritance tax change in 2017?
Inheritance tax threshold
Under existing UK law, you must pay a 40% inheritance tax if your estate is worth over £325,000. From April 2017 your threshold could include a “family home allowance,” which by 2020 will raise your individual inheritance tax limit to £500,000, if you leave your home to your children or grandchildren.
For inheritance tax purposes, the government will treat you as two individuals if you are married. You and your partner will both be allowed to pass on your full inheritance tax allowance to each other when you die. This new allowance is still transferrable even if you or your partner pass away before April 2017. But your estate must include an actual family home to qualify for this new allowance. It must be your main residence, so additional properties will still count as part of your main estate.
The Telegraph notes that this allowance will be gradually phased in. It will be set at £100,000 for the 2017 – 2018 tax year. This amount will then rise to £125,000 in 2018 to 2019, £150,000 in 2019 to 2020 and will finally hit £175,000 in 2020 to 2021. By April 2020, as a married couple you and your spouse will be able to pass on as much as £1m to your direct descendants tax free.
We should note that this relief will be removed at a gradual rate for estates worth more than £2m. But what happens if you decide to downsize your home? In this instance, you will be eligible to apply for an inheritance tax credit. This means that as long as you bequeath the majority of your estate to your descendants, you will still be able to use the allowance.
Prestige Tax and Trust Services
So what does all this mean for your inheritance tax bill? As long as your estate includes your main family home, with this new allowance you’ll be able to significantly reduce your inheritance tax bill. So let’s say the value of your family home is worth £200,000 and your other assets are worth £300,000. At the moment you would pay £70,000 inheritance tax but once the policy is fully phased in you would pay no inheritance tax, because the value of your estate will just fail to eclipse £500,000.
You need to know when you should pay inheritance tax on your estate, so that you can pass your assets on to you loved ones when you die. You may want to employ expert help to ensure that you stay abreast of the coming changes to the inheritance tax threshold and can plan your estate appropriately. We provide the services you need to handle inheritance tax matters appropriately.