Inheritance Tax- Family home allowance
With rising property prices in recent times many families in the UK have been elevated to millionaire status and therefore dealing with the inheritance tax (IHT) implications that accompany it. Inheritance Tax is a tax on the estate (the property, money, and possessions) of someone who’s died. Nearly £4.6 billion has been collected by the Treasury in the year 2015/16 from IHT reflecting no signs of decelerating any time soon. Former chancellor George Osborne introduced the residence nil-rate band in his Summer Budget 2015 to make it easier to pass on the family home to direct descendants without incurring the tax burden.
Resident Nil Rate Band (RNRB) was introduced by the government on April 6, 2017, the additional element of which applies to the family when a property is passed on death to the direct descendants. Only direct descendants described as below of people who have died can benefit from the new rule RNRB:
- Children and their spouses or civil partners
- Grandchildren and their spouses or civil partners
- Great-grandchildren and their spouses or civil partners
- Adopted children
- Foster children
Children who were under the guardianship of the people passing on their estate.
How family home allowance works:
- Standard Inheritance Tax rate is 40%, to be charged on the part of your estate that’s above the threshold i.e. £325,000.
- Post-April 2017, a new higher threshold including “family home allowance” going to be phased in which requires the estate to be passed on death to direct descendants.
- Married couples may pass on estates of up to £1 million to direct descendants, including the family home, however for estates over £2 million, the new property allowance is reduced by £1 million which means one will lose the entire main residence nil-rate band.
- Anyone looking to downsize his/her estate by selling an expensive property or go into care does not miss out on the tax break as long as most of the estate left with direct descendants.
Inheritance Tax allowance over the next
|Year||Nil-rate band||Residence nil-rate band||Individuals||Couples|
For later years, the threshold will go up in line with inflation based on the Consumer Price Index.
Who pays the tax to HMRC:
The beneficiaries (who inherit estate) do not normally pay tax on things they inherit, but the related taxes e.g. if one gets rental income from a house left to him/her in a will. So this is done by the person dealing with the estate called executorif there is a will. Funds from your estate are used to pay Inheritance Tax to HM Revenue and Customs (HMRC).
Inheritance Tax must be paid by the end of the sixth month after one’s death. HMRC will start charging interest if the tax is not paid within the said timeframe. There’s normally no inheritance tax to pay if you give away your home and live out for another 7 years, however, if you die within 7 years of giving away, it will be treated as a gift and the 7 year rule applies.