How does Inheritance Tax Work?
Inheritance Tax is generally charged at 40% on the taxable portion of an estate above the available tax-free thresholds.
The standard Inheritance Tax nil-rate band is currently £325,000. Homeowners may also be eligible for a residence nil-rate band of up to £175,000 when passing a qualifying home to direct descendants. This means a qualifying individual can potentially pass on up to £500,000 without an Inheritance Tax liability.
The residence nil-rate band is subject to certain conditions and is tapered for estates valued above £2 million.
For married couples and civil partners, unused allowances can potentially be transferred between spouses. This means that, where the relevant conditions are met, a surviving spouse or civil partner could potentially benefit from allowances of up to £1 million.
The rules are complex, however, and the amount of Inheritance Tax due depends on the individual circumstances of the estate.
Why is Property Important?
For many homeowners, their property represents a significant proportion of their overall wealth. As a result, the value of a home can be an important consideration when calculating the value of an estate.
Where an estate is liable for Inheritance Tax, beneficiaries may need to consider how the tax will be paid. In some circumstances, this could involve selling an inherited property.
The potential tax implications can therefore be an important consideration for families when thinking about their longer-term property and financial plans.
What Could Change?
Badenoch has said that she is open to reducing or potentially abolishing Inheritance Tax, describing it as morally right that people should be able to pass wealth on to their children without being taxed twice. However, no specific policy has been announced and any changes would depend on how they could be funded.
Possible changes could include increasing the tax-free thresholds, reducing the rate of Inheritance Tax or abolishing it altogether. Each would have a different impact on homeowners and their families.
For now, these remain proposals rather than confirmed changes to the current tax system.
What this Means for Homeowners
For anyone considering their longer-term financial or estate planning, it is important to understand the rules that apply today rather than make decisions based on possible future changes.
The value of your home is only one part of an estate, and Inheritance Tax can be affected by other assets, liabilities, gifts and available allowances. The rules surrounding the passing on of a property can also vary depending on who inherits it and how the property is owned.
Professional financial or legal advice can therefore be valuable when considering how a property and other assets may be passed on.
For homeowners considering a future move, the potential tax implications of selling or retaining a property may also be one of several factors to discuss with a qualified adviser.
Keeping Up-to-date with Property News
With Inheritance Tax continuing to be debated and the current thresholds remaining an important consideration for homeowners, this is an area that families may wish to keep under review.
At Mackenzie Smith, we understand that decisions around property are often about more than the move itself. Whether you are considering selling your current home, helping a family member with a property decision or planning for the future, our local teams are available to provide advice on the property market and the options available to you.
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