Posted by Mandy Casavant, Partner
80% inheritance tax bill? Setting the story straight
The Telegraph published an article in December entitled “Inheritance tax shocker: Some families will pay 80pc”. Be assured, there is no 80% inheritance tax rate, and this “shocker” only applies in very limited circumstances.
Inheritance tax is a tax which normally only applies to someone’s assets after they die. Broadly speaking, each person on death currently has up to £325,000 of their assets charged at 0% (meaning no tax is payable on that amount), and inheritance tax is charged at 40% on the value of the assets above that amount.
Unfortunately, inheritance tax is more complicated than this. There are exemptions, deductions, different rates of tax, and difficulties in valuing assets and dealing with HMRC. And there are penalties for mistakes including fines and personal liability for executors.
Government policy allows people to plan during their lifetime to minimise inheritance tax. However, to do so requires detailed knowledge of that tax.
Many are pleased that from April 2017 an additional ‘tax free’ amount will be available for people who pass their home (or other assets which directly represent the interest that the person had in their home – i.e. sale proceeds from selling home/downsizing within a certain period of time) on to their descendants on death. This is called the Residence Nil Rate Band (RNRB). However, many commentators have expressed their frustration at the complexities of the RNRB.
The RNRB will be £100,000 for each person’s estate, but will increase each year up to 2020, eventually reaching £175,000 each. However, the RNRB reduces when an estate is worth more than £2m and in 2017/2018 the RNRB will be unavailable for estates worth £2.2m and over.
The ‘80% tax shocker’ only applies when you compare two married/civil partnership couples, taking advantage of the RNRB, when one couple’s combined estate is worth £2m and the other’s is worth £2.2m. The £2m estate would pay inheritance tax at £460,000, with the other estate paying £620,000. The £2.2m estate (worth £200,000 more than the other estate) would pay £160,000 more in tax than the other estate, and so you could say that the additional £200,000 is being ‘taxed at 80%’.
Despite the Telegraph’s headline, there is no 80% inheritance tax rate and the 80% tax “shocker” only applies in very limited circumstances. However, The Telegraph does highlight the complexities of the rules and the need to ensure that you have undertaken careful planning in terms of how your assets are held and the terms of your Will.
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