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Inheritance Tax: What you need to know

Rumours of changes to the rules surrounding Inheritance Tax were strongly speculated ahead of the last two government budget announcements, but up until now no amendments have occurred.

However, in last month’s Spring Budget, Chancellor Jeremy Hunt did announce some tax changes that might have implications for your estate.

With the help of our Wills, Trusts & Probate specialist, Louise Gibbs-Kneller, we take a look at these latest updates and how Inheritance Tax could affect your estate.

Non-domicile tax status to be scrapped

This applies specifically to those people who are considered to be domiciled elsewhere for tax purposes. For people who currently have this status, the change will affect their Inheritance Tax position.

However, the government haven’t yet set out how this will be dealt with. They have stated there will be consultation on this in due course. Those with non-domicile status will need to be aware of the impending changes and seek advice when further announcements are made as to how this will affect their estates for Inheritance Tax purposes.

Inheritance tax changes to grants on credit

Currently, when applying for a grant of probate, Inheritance Tax is payable before the grant is issued. If the estate doesn’t have enough in cash assets to pay the tax, and the executors are unable to obtain any finance (e.g., a commercial loan) to pay the Inheritance Tax, then the executors can apply for what is known as a grant on credit to enable the grant to be issued so that funds can be accessed.

The change will make it slightly easier to apply for a grant on this basis, by removing the need to show that commercial loans have been applied for first.

Extension of Agricultural Property Relief (APR)

APR is an Inheritance Tax relief which applies specifically to agricultural property in a person’s estate. The budget sets out an extension to this, to include certain environmental land management agreements. We await further details on which ones are included. Clients who own agricultural assets may need to check whether the extension will apply to them.

Inheritance Tax FAQs

When is Inheritance Tax charged?

Generally, Inheritance tax is charged on the estate of a person who has died. There are circumstances where an Inheritance Tax charge may be made during a person’s lifetime, such as in relation to trusts.

What is the rate of tax?

Inheritance Tax is charged at 40% unless the lower charity rate of 36% can be applied (see below).

What is the Inheritance Tax threshold? “I heard the limit is now £1million before you pay Inheritance Tax” is that correct?

Potentially. In basic terms each person’s estate can be up to £325,000 before Inheritance Tax becomes payable.

However, if you are a married couple, and you are ultimately leaving your estate to your children then you may have combined allowances of up to £1million when the second spouse dies. However, it is important that you seek advice about your particular circumstances and ensure that your Will is appropriately drafted to allow for this to be claimed.

I have a business, how will this affect my estate for Inheritance Tax?

If you own a business at the time of your death, it might be eligible for an Inheritance Tax relief known as business property relief (BPR). You must meet certain conditions around the type of business and the length of ownership to qualify for the relief.

Can I avoid Inheritance Tax if I make lifetime gifts of my money?

Anyone can make a lifetime gift of money or property. However, there are a number of things to consider before doing so to ensure you do not fall foul of HMRC rules around gifting, and make sure there are no detrimental effects on your estate under Inheritance Tax rules.

In relation to property or land, if you retain any benefit after gifting it, then it is likely to still be considered part of your estate for tax purposes.

Additionally, if a person dies within seven years of making a gift, then that gift may potentially result in Inheritance Tax becoming payable on that particular gift.

There are lots of things to consider, and we advise taking advice before making large lifetime gifts, to ensure you are fully informed about any potential consequences.

Are there any exemptions in relation to lifetime gift to allow me to gift tax free?

There are gifting allowances available to allow people to gift tax free, some of which are as follows:

  • Annual allowance – each person has an annual allowance of £3,000 per tax year. This means you can gift this each year without any Inheritance Tax consequences.
  • Small gifts allowance – you can make as many gifts of £250 or less to as many people as you like. However, the gifts cannot be to the same people who receive all or part of the £3,000 allowance.
  • Gifts on marriage/civil partnership – You are able to gift tax free amounts to your children or grandchildren on their marriage/civil partnership. You can gift a child £5,000, and a grandchild or great grandchild £2,500.

There are other gifting allowances potentially available. We recommend you seek advice on your own financial circumstances, and if you choose to make gifts it is important to keep good records that your executors are able to find.

What if want to leave money to charity?

Charitable gifts are exempt from Inheritance Tax. So, if you leave a charitable gift in your Will this will be taken into account when Inheritance Tax is calculated on your estate.

There is also a lower rate of Inheritance Tax available of 36%. To qualify for this, you must leave at least 10% of your net chargeable estate to a registered charity.

The calculation to work out if your proposed gift would meet this requirement can be complex, and it is important to seek advice on your proposed gift to determine if it is likely to meet the requirement for the lower tax rate on your death.

I’ve heard married couples don’t have to pay Inheritance Tax” is this true?

When the first spouse dies, anything that passes to the surviving spouse is free of Inheritance Tax under the ‘spouse exemption’. However, on the death of the second spouse Inheritance Tax may be payable on the combined estate.

How we can help

Our team of experienced experts are happy to talk through with you the potential tax implications relating to your situation – helping you understand any reliefs and exemptions and contacting HMRC if you are an executor of an estate.

Our overall aim is to put you in a position where you understand the Inheritance Tax legislation and can reduce your estate’s liability to pay this.

Our friendly and experienced Wills, Trusts & Probate team can help you make plans for your own affairs, as well as supporting you in administering an estate if somebody close to you dies.

Contact us by completing our online form or by calling 01603 620508.

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    This article was produced on the 3rd April 2024 by our Wills, Trusts & Probate team for information purposes only and should not be construed or relied upon as specific legal advice.