Increase in Inheritance Tax threshold
A new tax year began on 6 April 2020 and with it we hit the long promised £1 million threshold for Inheritance Tax
. For many though, it is not as beneficial as it first appears and the additional threshold can be easily lost, even where you manage to qualify in the first place.
Some may recall the introduction of the residence nil rate band in April 2017 which provided individuals with an additional £100,000 threshold before Inheritance Tax was payable at 40%. The threshold has increased by £25,000 every new tax year and on April 6 2020 it reached the maximum level of £175,000.
The residence nil rate band only benefits those who own (or have owned) a residence and are leaving this to their children or grandchildren. You cannot benefit from the residence nil rate band if you do not have children, although the definition of children is wider than for other areas of private client practice. The residence nil rate band also begins to taper away for those with an estate of more than £2 million.
For those who are married or in a civil partnership and who qualify, the residence nil rate band of £175,000 together with the nil rate band of £325,000 gives each spouse or civil partner a threshold of £500,000 before Inheritance Tax is payable at 40%.
Both nil rate bands are transferable between spouses and civil partners if unused on the first death. This means that if your estates are managed properly and careful planning is undertaken, the second spouse to die can use their own nil rate bands together with the nil rate bands transferred from the estate of the first spouse to die, giving a total threshold of £1 million.
In order to protect your estate as well as maximise Inheritance Tax reliefs and thresholds, estate planning is required. If you have any questions about the residence nil rate band or any other estate planning matters, please get in touch.