Inheritance tax (IHT) can be a complex and often misunderstood aspect of estate planning One area that many people find particularly confusing is how IHT applies to property In this article, we will break down the basics of IHT on property and provide you with a better understanding of what you need to know.
IHT is a tax that is levied on the value of an individual’s estate when they die This includes all assets such as money, possessions, and property The current threshold for IHT in the UK is £325,000, known as the nil-rate band Any value over this threshold is subject to a tax rate of 40% However, there are certain exemptions and reliefs that may apply, such as the residence nil-rate band (RNRB) for property.
The RNRB was introduced in April 2017 and is an additional allowance that can be claimed on top of the standard nil-rate band The RNRB allows individuals to pass on a property, or a share of a property, tax-free to direct descendants, such as children or grandchildren The current RNRB allowance is £175,000 per person, and this is set to increase to £175,250 in the 2020/2021 tax year.
To qualify for the RNRB, the property must have been the main residence of the deceased at some point and must be left to direct descendants This means that buy-to-let properties or second homes may not be eligible for the relief There are also provisions in place for individuals who downsize or sell their home before death, as long as certain conditions are met.
When it comes to calculating IHT on property, the value of the property will be included in the deceased’s estate and subject to the relevant tax rates iht on property. However, the RNRB can be deducted from the value of the property before any tax is calculated For example, if an individual’s estate is valued at £500,000 and they leave their £300,000 property to their children, the RNRB of £175,000 can be deducted from the value of the property before calculating the tax due.
It is worth noting that there are certain planning opportunities that individuals can take advantage of to reduce the impact of IHT on property One common strategy is to make use of trusts, which can help to protect the property and pass it on to beneficiaries tax efficiently Setting up a trust can allow the property to be held outside of the deceased’s estate, meaning that it is not subject to IHT when they die.
Another option is to consider making gifts of the property during the individual’s lifetime This can help to reduce the value of the estate and therefore the potential tax liability when they die However, it is important to be aware of the seven-year rule, which states that gifts made within seven years of death may still be subject to IHT if they exceed the nil-rate band.
In some cases, it may be beneficial to take out a life insurance policy to cover any potential IHT liability on the property By setting up a policy that pays out a lump sum on death, the proceeds can be used to cover the tax bill and ensure that the property can be passed on to beneficiaries without any financial burden.
In conclusion, IHT on property is a complex area of estate planning that requires careful consideration and expert advice By understanding the basics of how IHT applies to property, individuals can take steps to mitigate their tax liability and ensure that their assets are passed on in the most tax-efficient way possible Whether it is through making use of reliefs and exemptions, setting up trusts, or taking out life insurance, there are a range of options available to help manage the impact of IHT on property.