Inheritance tax changes heralded in by the changing tax year mean you can pass on at least an extra £25,000 of your wealth tax-free – and maybe more once a government review ends.
The tax-fee IHT limit raises to £900,000 for married couples and civil partners from April 6, 2018.
The limit is made up of two IHT bands –
- The nil-rate band of £325,000 for an individual, which remains unchanged from the previous tax year.
The nil-rate band allows someone to pass on wealth of £325,000 without incurring IHT, which is paid at a rate of 40%.
- The rest comes from an increase in the band for leaving close relatives your main home.
This allowance rises from £100,000 in 2017-18 to £125,000 this tax year.
Close relatives are direct descendants, such as children, grand children and even great grandchildren – care must be taken over whether step grandchildren qualify for the allowance.
IHT rules under review
As the first of a couple to pass on can transfer their nil rate and main home bands to their spouse, the total tax-free amount adds up to £900,000.
Any wealth exceeding the thresholds is subject to IHT at 40%.
This may improve later as Chancellor Phillip Hammond has ordered the Office of Tax Simplification to review IHT rules which might allow couples to pass more on to their families and loved ones tax-free.
Although the complicated gifting rules let people give away some of their wealth each year without paying tax, the rules mean if they die within seven years of making the gift, some tax may be due.
PET gifts to loved ones
These gifts are called ‘potentially exempt transfers’ or PETsand are the tax rules the chancellor is targeting.
PET rules can lead to relatives paying tax years after receiving a gift.
Other potentially IHT free ways to leave money include holding investments and savings in life insurance policies or pensions, including offshore Qualifying Recognised Overseas Pension Schemes (QROPS) for expats.
These are easily left outside of the scope for IHT by writing them in trust.
ISA cash or investments are not caught by this rule and are liable to IHT.
