Inheritance Tax: Exemptions and Reliefs
Inheritance Tax is always a hot topic, both in the news and within political arenas. Despite this, and with the troves of information online, it can be difficult to work out how our estates might be taxed when we pass away. There are numerous allowances and exemptions which can be claimed against an estate on death, depending on the value of assets and to whom an estate is passing.
Nil rate band allowance
The nil rate band is the initial amount available on which an estate does not have to pay tax. This allowance is available to everybody, regardless of their circumstances, and is currently set at £325,000. As a result, if an estate falls within this allowance, there will be no inheritance tax due (provided the allowance has not been reduced by relevant lifetime gifts).
Transferable nil rate band allowance
In instances where married couples, or those in a civil partnership, leave the entirety of their estate to one another on the first of their passing, HMRC allows the nil rate band of the first to be transferred to the second on their death, in its entirety. This is because all assets passing from one spouse to another qualify for a spousal exemption.
Effectively, this means that on the death of the second to pass, there are two nil rate bands available and therefore a total allowance of £650,000 based on current figures. If some, but not all of an estate passes to a spouse, any unused nil rate allowance can be transferred on the second spouse's death.
Residential nil rate band
The residential nil rate band is available when a number of criteria are met. Specifically, a property or interest in a property that the deceased owned and lived in, must be passed to a child, grandchild or great grandchild (or a spouse of one of those categories) on death. Interestingly, stepchildren fall within these requirements, insofar as the residence nil rate band is concerned.
The maximum residence nil rate band allowance available is £175,000 (depending on the value of the property and the share passing to a lineal descendent), but it should be noted that for estates which exceed £2 million, the available allowance is reduced. For estates which exceed £2.35 million, the residence allowance is lost completely.
Spousal exemption
As mentioned above, any assets passing between spouses and civil partners are exempt from inheritance tax.
Charity exemption
Like the spousal exemption, assets passing to charity on death are exempt from inheritance tax. As such, if an entire estate passes to charity, there will be no inheritance tax due. Not only this, where more than 10% of the net value of an estate is bequeathed to charity on death, the rate of inheritance tax for the whole estate is reduced from 40% to 36%.
Business property relief
For some estates which contain a business, or business assets, a further relief can be applied. This depends on the nature of the business carried out and for how long the interest has been held, amongst other factors. Business property relief is applied at either 50% or 100%.
Agricultural relief
Some agricultural property can pass free of inheritance tax, including land used to grow crops or rear animals. Once again, certain criteria must be met as to the length of time the agricultural assets have been held and further where these agricultural assets are located. Where assets qualify for agricultural relief, this is applied at either 50% or 100%.
With all of the complexities of inheritance tax in mind, it is important to ensure that you have a carefully drafted will in place, which can maximise on the allowances and reliefs available.