My husband and I are in our early 60s and have recently retired. We have paid off the mortgage on our home, which we think is worth around £600,000.
Our other assets (mainly investments) are worth around £500,000, including a £100,000 investment, which we made recently, having been told it would be free of inheritance tax.
I am quite confused about the rules on inheritance tax, would our estate be liable for this?
We would not want the survivor of us to have to sell our home. We also have two adult children and three grandchildren (and counting!) and hope to be able to leave them a decent inheritance.
I am quite confused about the rules on inheritance tax –what are we actually liable for?
Lara Mardell, legal director, BDB Pitmans replies: The first point to note is that provided you leave your estates to each other the ‘spouse exemption’ for inheritance tax should apply when the first of you dies, so no inheritance tax would arise at that point.
Your home should therefore be safe.
When the survivor of you dies, there are some other very important reliefs that are likely to apply.
The first is that you and your husband would each have a ‘nil rate band’ of £325,000 each (less the value of any significant gifts made within seven years before death).
The rate of inheritance tax on this part of your estate is nil. Any unused nil rate band, or part of a nil rate band, can be passed to the survivor of you.
Therefore provided neither of you make significant gifts within seven years of your deaths you should have up to £650,000 between you which will effectively be free from inheritance tax.
If you have made gifts within seven years, these would use up the nil rate band available.
In addition to the standard nil rate band there is also a ‘residence nil rate band’. There has been some criticism of the residence nil rate band, as the detail of it is regarded by many as unnecessarily complex.
Lara Mardell of law firm BDB Pitmans
However, the key point about it is that it applies to individuals who have a home in their estate which is left to ‘direct descendants’ such as children.
The maximum amount of residence nil rate band is set to be £175,000 per person, with effect from 6 April 2020.
Where an estate is worth over £2million, the residence nil rate band starts to be eroded, though on the figures you provide this is unlikely to affect your estate.
Like the standard nil rate band, any unused residence nil rate band can be transferred to a surviving spouse, meaning that in practice a couple’s combined estate of up to £1million will usually be free of inheritance tax. The balance is subject to inheritance tax of 40 per cent.
Therefore, if you and your husband leave your estates to each other, then to your children, the first £1million of your combined estates should be free of inheritance tax.
This is Money adds: From the situation that you have outlined, this still leave some extra money – the £100,000 recently invested, which you say you’ve been told can avoid inheritance tax. It’s not exactly clear what the investment is, but the general position on that is as follows
Emily Taylor, partner, BDB Pitmans replies: Turning to the investment that you have been advised will be free of inheritance tax, this sounds likely to be an investment in shares in certain AIM-listed companies, which have the benefit of ‘business property relief’.
Such investments currently qualify for 100 per cent relief from inheritance tax, provided they have been held for at least two years.
You mention you made this investment recently, so it may be that the two-year qualifying period has not yet passed, but once it has, no inheritance tax will be payable on it.
Emily Taylor of law firm BDB Pitmans
However, you should be aware that the Government has been consulting on business property relief, and whether it should be restricted or removed altogether, so this relief may be lost.
If this happens the estate of the survivor of you will exceed the available allowances (i.e. the nil rate bands) by £100,000 (using current values).
This would be subject to inheritance tax at 40 per cent, giving rise to a bill for your estate of £40,000.
Such investments are also regarded as risky, so we always recommend taking appropriate independent investment advice when making them.
On current values, and with the current nil rate bands and reliefs in place, it seems likely that your combined estate would not be liable to inheritance tax at all.
However, even without the £100,000 investment that would currently be relieved from inheritance tax, your estate is around £1million – the maximum that is covered by your combined nil rate bands.
If your estate goes up in value, a portion of it would therefore be subject to inheritance tax, though it is likely that the tax would be moderate compared to the value of your estate.
HAVE YOU SORTED OUT YOUR WILL?
Make sure you’ve got the basics covered before starting inheritance tax planning. Read a This is Money guide to sorting out a will here.
Some links in this article may be affiliate links. If you click on them we may earn a small commission. That helps us fund This Is Money, and keep it free to use. We do not write articles to promote products. We do not allow any commercial relationship to affect our editorial independence.