Inheritance Tax: The new tax year will bring higher thresholds – could it reach £1million?
Inheritance tax is generally unpopular as many consider it a “death tax”. It is usually levied on estates once a person has died and their assets are being passed on. The tax is only paid on estates of certain values and the determining thresholds are about to increase.
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Currently, inheritance tax is only paid on estates valued above £325,000, also known as the nil rate band.
There is a 40 percent charge on estates higher than this but it is only paid on the parts of the estate that are above the threshold.
So, for example, if an estate is valued at £400,000, 40 percent will only be charged on £75,000.
However, there is another element of inheritance tax called a residence nil rate band.
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This rule means that if the person gives their home to children or grandchildren, their threshold will be increased to £475,000.
This will be useful for people who have seen their property values skyrocket in recent years, putting them (unintentionally) in the tax bracket.
People will likely feel even more relieved from tomorrow as the residence nil rate band rate is increased.
As the new tax year starts, the band will be raised from £150,000 to £175,000.
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So in total, estates of £500,000 will not face any inheritance tax bill so long as the home is passed on to family.
It should be noted that it is possible to add unused thresholds to a spouse or civil partner.
This means that from tomorrow, certain thresholds could be as high as £1million.
Inheritance tax can be extremely complex as rules on gifts and timings could impact what’s paid.
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To fully understand it and plan for it, many people may need to turn to financial planners who can be very costly.
Many experts within the field were hoping and expecting that Rishi Sunak would make simplifying changes to the system in his budget.
While he did make changes to other forms of tax, there was no mention of any forthcoming alterations for inheritance tax.
This surprised and, in some cases, disappointed several tax professionals.
Rachael Griffin, a tax and financial planning expert at Quilter commented on this lack of clarity: “The Chancellor dodged the intricate maze of complication that is inheritance tax with no mention of any simplification or changes.
“The review of inheritance tax conducted by the Office of Tax Simplification was commanded by Phillip Hammond and it may be the new Chancellor doesn’t have any inclination to make changes.”
Despite this, it may be the case that changes could be forthcoming. As coronavirus continued to be a problem, the government launched several changes to various financial rules. Mortgage repayments, benefit payments and businesses have all faced alterations in recent weeks as Mr Sunak revealed that he will do “whatever it takes” to support the economy.
As he detailed in mid-march: “Last week, I set out an initial economic response in the Budget.
“I promised to do whatever it takes to support our economy through this crisis – and that if the situation changed, I would not hesitate to take further action.”
It is possible that this “further action” could be extended to inheritance tax if it becomes a bigger problem for people struggling with coronavirus.
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