The main residence tax allowance of £100,000 planned by former chancellor George Osborne to reduce inheritance liability has now come into effect.
Inheritance tax is set at 40% and becomes payable once the tax free threshold of £325,000 has been passed. It is one of the most unpopular taxes as it reduces the amount of money people can pass on to their children.
This has become more of an issue in recent years as more people have become affected due to rising house prices.
Mr Osborne sought to alleviate the problem by adding an additional main residence allowance of £100,000, which is effective from April this year. It only applies to a person’s home, not the rest of their estate, and will rise gradually to £175,000 by 2020.
When added to the £325,000 nil-rate band for inheritance tax, this will provide a combined tax-free band of £500,000 by 2020. Married couples can combine their allowances. When one partner dies, their share of the estate is passed on to their spouse free of any inheritance tax.
This means that by 2020, a married couple could have a combined allowance of £1m.
It will be a welcome boost for couples who wish to reduce their tax liability so their children can inherit as much of their estate as possible.
There are also other steps people can take to reduce the burden.
One helpful way to pass money on without inheritance tax implications is to adopt the ‘little and often’ approach. This allows you to give away £3,000 per year tax free. It’s a useful way to give money to your children without them running the risk of having to pay tax on it when you die.
There is also a ‘seven year gift rule’ which allows a person to give money or assets of unlimited value. The recipient will not pay inheritance tax as long as the person lives for at least seven years. If the person dies within seven years of making a gift then the recipient could be liable to pay the 40% inheritance tax, depending on the value of the estate.
These are just some of the ways you could reduce inheritance tax liability. A little planning now could save your families thousands of pounds in the future.
Please contact us if you would like more information about the issues raised in this article or any aspect of inheritance tax planning.