Consider this: when you add together your savings, belongings, your house, your pension, business interests and any life assurance proceeds, how much is your estate worth? The most recent statistics suggest the average household has a net wealth of more than £225,000 and climbing.
However, it has been suggested that as many as 64,000 people per year will be hit by inheritance tax by 2020.
Currently, those leaving an estate worth less than £325,000 do not have to pay any inheritance tax. However, for every penny over this amount, the government will take a 40 per cent cut.
However, as of 6 April this year, a change in the law means that thousands of people could be eligible for an extra, money saving allowance.
What is the ‘residence nil rate band’?
The residence nil rate band concerns your family home. If you choose to leave this property to one of your direct decedents in your will, your estate will be entitled to an additional allowance of £125,000 – up from £100,000 last year.
This is on top of the existing £325,000 – bringing the total inheritance tax exempt allowance to £450,000.
While the residence nil rate band is dependent on your family home, the inheritance tax relief it provides is applicable across your entire estate – not just on the value of that home.
Better still, any of this additional allowance which you don’t used can be passed on to your spouse, meaning their own allowance will increase by the remainder, plus their own nil rate band allowance.
How would this work in practice?
By way of example – let’s say ‘John’ passes away during this tax year, leaving behind his wife and two children.
John holds the family home in his sole name and it’s worth £350,000. The rest of his assets – covering savings and investments – are worth £100,000, bringing his total estate to £450,000
As set out in John’s will, his property will pass to his children, and the rest of his assets will pass to his wife.
Because the £100,000 worth of assets are being passed to his wife, this will trigger ‘spousal exemption’ – meaning no tax to pay.
For the property – which will pass to his children – John’s house comes in £25,000 over the standard £325,000 threshold. Ordinarily, the government would take a 40 per cent cut of this £25,000. However, with the residence nil rate band in place, John’s estate will attract precisely zero inheritance tax!
What’s more, the unused £100,000 of the residence nil rate band will be transferred to his wife’s estate upon her passing.
How do I make sure I take advantage of this allowance?
The first step in making your estate ‘inheritance tax efficient’ is by making a will.
A straightforward will can be drafted relatively cheaply and will take very little time. However, creating a will that works alongside the latest changes in inheritance tax requires careful planning and the help of an expert will writer.
Even if you already have a will in place, you should take the time to review it, periodically, to make sure that you keep control of any inheritance you plan to leave for your loved ones.
Make sure that you seek the advice of a probate specialist. A relatively small cost for expert advice could end up saving you and your loved ones tens of thousands of pounds in the long term.
Find out more
You can find out more about financial planning and inheritance tax at a free seminar being held by national law firm Stephensons, Derian House Children’s Hospice and wealth management company Brewin Dolphin in Chorley on 5 June.
Experts in financial planning, wills and probate law will discuss how attendees can make their wills as ‘tax efficient’ as possible through the use of trusts, tax-exempt charitable giving and legacies should attend.
To book a place or for further information, please contact [email protected] or telephone 01257 271271
About the Author / Gareth Hargreaves
Gareth looks after all editorial content on 50connect. He is the Swiss Army knife of content ideas and production.
