Why your property is important when managing your Inheritance Tax bill

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In the 2020/21 tax year, Statista report that Inheritance Tax, often considered “Britain’s most hated tax”, claimed £5.32 billion from the beneficiaries of those who had passed away.

Inheritance Tax (IHT) is a charge on the estate of someone who has passed away. The charge currently stands at 40% but is only payable on any part of the estate over the nil-rate band.

If you don’t successfully manage your estate in time for your death, your beneficiaries may end up paying large amounts of tax on anything they receive.

With successful planning, it is possible to mitigate the impact of IHT. One such way of doing this is using your property and the “residence nil-rate band.”

But what is the residence nil-rate band, and how can your property help you to pay less tax? Read on to find out more.

The nil-rate band is a tax-free threshold on your estate

Individuals in the UK benefit from an IHT exemption known as the “nil-rate band”. In the 2021/22 tax year, this figure stands at £325,000, and has been frozen until 2026.

Your estate encompasses everything you own, including your property, possessions, and any other assets at your disposal.

If the value of your entire estate is below £325,000, then your beneficiaries will not pay any IHT on anything you leave behind. If the value of your estate is greater than £325,000, then they will pay a tax charge of 40% on anything above the nil-rate band.

However, the introduction of the residence nil-rate band raises the threshold at which your beneficiaries would normally need to pay IHT, provided that you leave your property to a direct descendant.

As such, planning your estate around IHT is crucial. This is especially true given the rapid rise in house prices, which may catch you off-guard when it comes to your planning.

Rising property prices could result in many paying IHT charges when they weren’t expecting to

The price of housing in the UK has been increasing rapidly for several years. The average house price in 1980 was just £19,273. According to the Office for National Statistics, the average house price in January 2010 stood at £167,469, and in July 2021 it was £255,535.

That means that, if you bought your house a long time ago, it is likely worth far more than what you initially paid. Even if you bought it just a few years ago, it could still be worth significantly more than when you first purchased it.

This can catch many people out when managing their estate for inheritance purposes. This is especially true as the nil-rate band has remained at £325,000 since April 2009. Prior to this date, the nil-rate band increased on a yearly basis, often by figures of around £10,000.

Should this trend have continued, the current nil-rate band could be nearly £450,000 now.

Given the freeze, it is entirely possible that your home alone could push you over the IHT threshold. This means that a large portion of Brits could be stung by Inheritance Tax charges that they never expected to pay.

The residence nil-rate band provides you with an added tax-free allowance

The residence nil-rate band was initially introduced in 2017. It can raise the threshold at which you start paying IHT by £175,000, provided that you leave your main residence to a child or grandchild.

In this case, “child or grandchild” also includes stepchildren, foster children, or a child for whom you were appointed as legal guardian.

This means your beneficiaries will not need to pay any IHT on your estate up to £500,000.

If you own multiple homes, only one may qualify for the residence nil-rate band. Plus, if the value of your estate totals more than £2 million, then your tax-free allowance is reduced by £1 for every £2 above that number.

What this means is that if your estate totals more than £2.35 million, you will not benefit from the residence nil-rate band.

Planning with your partner allows for greater flexibility

Financial conversations with your partner are crucial at all stages throughout your life together. Understanding one another’s situation and managing expectations are key to ensuring financial stability and security.

This doesn’t change when you pass away, as anything you leave to your spouse is usually tax-free, no matter the value.

This unused nil-rate band, plus the residence nil-rate band, can be transferred to your partner when you die. This means that you could potentially leave £1 million to your beneficiaries with no Inheritance Tax bill.

Understanding and making use of the residence nil-rate band could save you thousands

By working together with your partner and a financial adviser, you could save you and your family thousands when it comes to Inheritance Tax.

Successfully managing your estate is crucial in mitigating the effect of Inheritance Tax and knowing what to do with your property could make all the difference.

If you want to discuss your options when it comes to planning your estate, please get in touch. Email enquire@london-money.co.uk or call us at 0207 808 4120 to find out more.