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Taxing Times - Inheritance Tax Explained

on Friday, 04 November 2016.

Answers to some frequently asked questions on inheritance tax

Does everyone pay inheritance tax on death?

No. Not everyone pays inheritance tax. It will only be paid if the value of your ‘estate’, at the date of death exceeds the value of the inheritance tax threshold (also known as the ‘nil rate band’). The current nil rate band is set at £325,000 (2016/17).

What does my estate include?

Your estate includes all assets held by you at the date of your death. This includes your share of joint assets, including cash, property and any investments. This also includes your ‘worldwide’ assets, such as property or investments overseas. If you are a beneficiary of a trust, the trust assets and/or income may also form part of your estate.

What if I give away any of my assets during my lifetime? Will these assets still form part of my estate?

Potentially. It will be down to your executors to carry out proper investigations to establish whether gifts were made by you during your lifetime, and to make full disclosure of any such gifts. They will need to report what the gifts were, when you made the gifts and who you made the gifts to. The definition of 'gifts' can include anything from giving away cash and personal possessions, to assisting friends or family members by paying for holidays or school fees.

Generally speaking, assets given away over seven years before the date of death no longer form part of your estate. However, many people do not realise that there are exceptions to this rule. If your executors fail to make full disclosure to HMRC of all issues relevant to your Inheritance Tax position, HMRC can and do impose penalties. This can be a complicated area and it is worth taking specialist advice.

Is the new main residence nil rate band likely to affect me?

The residence nil rate band (RNRB) is a new inheritance tax relief which is expected to be available from 5 April 2017. It will be relevant for individuals with direct descendants who have an estate (including a main residence) with total assets above the nil rate band allowance (currently £325,000).

The RNRB introduces an 'additional' nil rate band allowance (over and above the current £325,000) for estates which include property, or the proceeds of sale of property, in which the deceased has lived at some point. The property (or the proceeds) must be passing to the deceased's direct descendants. Direct descendants includes children, grandchildren and stepchildren, as well as children who have been adopted or fostered by the deceased.

The RNRB will be phased in between 5 April 2017 and 5 April 2020. The allowance is expected to be set at £100,000 in 2017/18 and will increase incrementally up to £175,000 by 2020/21, although there will be a 'tapered withdrawal' of the additional allowance for estates with a net value of more than £2 million.

Where the deceased is a widow or a widower, it may be possible to claim their spouse's RNRB in addition.

If you would like expert and practical advice on any of the above, or on our whole range of other private client services, please contact Mary McCrorie on 0117 314 5368.

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