Continuing our series of articles from Ann-Marie, Associate Solicitor at Barker Gotelee, here she shares a handy summary of inheritance tax including a peek at possible changes to the rules which may be coming.
What is inheritance tax?
Inheritance Tax (IHT) is a tax on an estate (meaning the property, money and possessions) of a person who has died.
The standard IHT rate is charged at 40% on the part of the estate that is above a specific threshold. The standard threshold is currently £325,000 (we call this the Nil Rate Band). However, there are certain instances where money above this threshold is not subject to the tax. For example:
- If a person dies and leaves everything above the Nil Rate Band (NRB) threshold to their spouse, civil partner, a charity, or a community amateur sports club, then there should not be any IHT to pay.
- If a person gives their home to their children (including adopted, foster, or stepchildren) or grandchildren, then the threshold can potentially increase to £500,000.
- If a person is married or in a civil partnership and their estate is worth less than the Nil Rate Band, any unused NRB can be added to the partner’s threshold when the other person dies. This means that the surviving partner’s NRB can currently be as much as £1 million from April 2020.
However, a new rule is currently being considered by the House of Lords which could result in large knock on effects for the public.
IHT: What could change?
Conservative peer Lord Lexden has introduced a new bill to address what he calls the “worst injustice” of cohabiting siblings facing large IHT bills. If the new rule becomes law, then cohabiting siblings could find themselves free of IHT on property left to each other.
The bill states siblings must have lived together for at least seven years, and the surviving sibling must be over the age of 30.
It comes after the high-profile case of Catherine and Virginia Utley, whose case to be considered exempt from IHT on assets left to each other was rejected.
The siblings have lived together for more than 30 years. They have said that under current rules, when one of them dies, the other would be forced to sell the family home in Clapham, London, due to a huge £140,000 IHT bill.
The bill, originally submitted in January 2020, will need to go through a series of readings in both the House of Lords and the House of Commons before it could become law. If it is made law, it will apply in England, Wales, Scotland and Northern Ireland to brothers and sisters as well as half brothers and sisters.
However, despite the proposal for the change in rules, IHT experts say the move does not go far enough to protect the many households affected by growing IHT bills. Cohabiting couples and cohabiting friends will still be subject to potentially life-changing IHT bills.
Many professionals in the area are lobbying to try and ensure the situation is made fair across the board but it is feared that not enough change will be made.
IHT is a complex area of the law and we would always advise taking specialist legal advice on it. Working together with the team at GreenSky Wealth or your own financial adviser, there may be ways to manage your IHT exposure. It’s certainly worth having a conversation about.
If you’d like to reach Ann-Marie to discuss your IHT situation, you can reach her on 01473 350574 or at [email protected].co.uk