Thanks to an increase in inheritance tax allowances, couples can now leave property worth up to £1 million free of inheritance tax, depending on the total value of their estate and who they leave it to.
Each person has a £325,000 inheritance tax level threshold which has remained unchanged for the past 10 years. On top of this though there is an allowance called a ‘main residence nil-rate band’ , which has this year increased to £175,000 – potentially giving a total tax free allowance of £500,000 per person.
How much is inheritance tax?
The level of inheritance tax payable depends on the total value of the estate and who it passes to.
Estates of any value can be passed to a spouse or civil partner tax free.
Estates valued up to £325,000, are also tax free. However, where that estate also includes the main residence which is passed to direct descendants the tax free allowance can increase by up to £175,000. Above that, inheritance tax is payable at the rate of 40% or 36% if at least 10 % of your assets have been left to a charity.
So for example, if you leave an estate to direct descendants and your estate includes a home worth £175,000 and your total estate is valued at £525,000, there will be no tax payable on the first £500,000 and 40% will be payable on the remaining £25,000; total tax payable is £10,000.
If the estate is worth £2 million or more the main residence nil-rate allowance element reduces by £1 for every £2 of value beyond the £2 million.
Who can I leave property to tax free?
You can leave property to your spouse or civil partner without having to pay any inheritance tax regardless of the value of the property. If you leave property to anyone else though, it will count towards the value of your estate.
If you leave your home, or your share in it, to your direct descendants the tax free threshold of £500,000 per person may apply, providing your total estate is worth less than £2 million.
Who are classed as direct descendants?
The government rules state that to benefit from the main residence nil-rate band allowance, you must be a direct descendent. This includes children, grandchildren, great-grandchildren, stepchildren, adopted children, foster children and children who you are a guardian for.
Siblings, nephews, nieces or other relatives are not eligible to claim the allowance when property is passed to them.
What if I leave more than one property in my will?
The main residence nil-rate band allowance can only apply to one property. You must have lived in the property at some stage in your life, but there is no minimum period that you must have lived there for.
If you leave more than one property then the executor of your estate can choose which property is to be used for the main residence nil-band allowance and which is to be counted with the rest of your assets.
If for example you sold your main home to go and live in a nursing home and therefore did not own a property at the date you died, there are provisions for your executors to still be able to utilise the residence nil-rate band.
What is included in an estate?
An ‘estate’ includes all property, money and possessions that the deceased person owned. The value of the estate will include cash in the bank, investments, cars, jewellery and insurance policies, minus any debts the person has, including utilities and loans.
How do I find the value of the estate?
You will need to contact banks and building societies to gather up any cash balances. You will also need to establish the value of any shareholdings owned by the deceased. You will then have to contact utility companies and other creditors to establish the value of any amounts outstanding.
Personal possessions such as cars and jewellery need to be valued and where individual items are likely to be worth more than £1,500 you may have to obtain a professional valuation for each item.
Most estates won‘t be taxable but where they are, the value of the estate affects the way you need to report it to HMRC. More details can be found here: https://www.gov.uk/valuing-estate-of-someone-who-died
If you would like help with some or all of the tasks involved in valuing an estate, or would like to discuss how your assets can be best protected, call our friendly team on 01302 320621 to have a chat about your options.