The children born to the ‘baby boomer’ population will inherit the highest amount of wealth any generation has ever seen, and perhaps for several generations into the future. They’re the wealthiest generation in history, collecting around £250,000, consisting mostly of property. This means the children of this generation are likely to inherit approximately £100,000 each. Even then, although it might raise their standard of living, it still won’t be enough to mitigate the impact of the housing crisis on younger generations.
What is inheritance tax?
Inheritance tax is a tax imposed on the property, money, and possessions of a person who has died. How much tax you should pay when you inherit these things depends on a variety of factors.
You don’t have to pay inheritance tax if:
- The value of your estate is below £325,000
- The deceased leaves anything above £325,000 to a spouse, civil partner, charity, or a community/amateur sports club
This threshold of £325,000 usually stands. However, if the deceased gives away their home to their child or grandchild, the threshold can increase to £475,000. If you pass it to a spouse or civil partner, there is no inheritance tax to pay on the home. Also, if you’re married or in a civil partnership and your estate is worth less than the threshold, you can add any unused threshold to your partner’s. This means your partners threshold before inheritance tax could be as high as £950,000.
Even if you inherit below the £325,000 threshold, you must still report your inheritance to HMRC. If you are due to pay inheritance tax, the standard rate is 40% of the value above £325,000. So, how can you keep this value to a minimum?
Keeping your inheritance tax bill low
We already mentioned in passing how you can lower your bill. Here’s how you can do it in more detail:
You can pass on a home to your spouse or civil partner when you die and there will be no inheritance tax to pay for this. However, leaving it to another person in the will ensures it counts towards the value of the estate.
There is usually no tax to pay if the deceased gifted a home to someone, moved out, and lived for at least another seven years. If they wanted to continue living in the home, they would have to show a history of rent payments to the new owner.
Main residence allowance
The main residence tax allowance came into place in 2017. The rules state if you’re passing your home to a direct descendant you can benefit from an extra £150,000 of tax-free inheritance. Direct descendants include:
- Great Grandchildren
- Adopted children
- Foster children
- Children under the guardianship of those passing on their estate
The tax-free amount is likely to increase to £175,000 by the 2020/21 tax year. This takes the threshold up to £500,000 tax-free income. This is only available if the home is worth under £2 million.
There are plenty of rules around paying inheritance tax. It’s hard to give blanket advice because the amount you’ll have to pay largely depends on the size of the estate, the assets involved, and individual family circumstances. So it’s always useful to get in touch with experienced solicitors who know the details of the inheritance tax process in enough depth to help you get the best outcome for your family.
Mark Reynolds Solicitors specialise in helping our clients create and manage wills, manage lasting powers of attorney, get a seamless probate service, and manage joint tenancies to give your family peace of mind. Get in touch with us today by calling 0800 002 9577 to get started.