Chancellor Philip Hammond surprised political commentators by producing what’s been described as a “giveaway budget” featuring tax cuts and increased public spending.
While many people will welcome the increase in personal tax allowance and extra funds for services like the NHS, there was also some disappointment that there was no increase in inheritance tax allowances and the amount of money a person can give away each year without creating tax liabilities.
Hopes of some improvement in this area were raised earlier this year with the announcement that the Office of Tax Simplification (OTS) is carrying out a review of inheritance tax thresholds to bring them up to date.
For example, the maximum sum that can be gifted tax free has been frozen at £3,000 a year since 1981. Back in the 1980s, a gift of £3,000 from parents to their children could be a life-changing sum, providing enough for a deposit on a home. That would not be the case today.
The OTS conducted a public consultation on inheritance tax between April and July and is expected to publish its report by the end of this year.
Mr Hammond didn’t mention the issue during his Budget speech so for the time being, families will have to make the most of the current allowances.
Inheritance tax is currently set at 40% and becomes payable once the tax-free threshold of £325,000 has been passed. There is no tax liability if a person’s estate passes directly to their spouse. This exemption does not apply to their children.
The government has recognised that more and more families are being caught by inheritance tax and has introduced an additional main residence allowance of £125,000. It came into effect in April 2017 and only applies to a person’s home, not the rest of their estate. It 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.
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 if the donor lives for at least seven years. If the donor 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.