All unincorporated businesses, including sole traders, the self-employed and trading partnerships, will be taxed on…
Campaigners are angry over the fact that more and more people will be drawn into paying Inheritance Tax (IHT), after a big rise in receipts.
They are angry that Chancellor Rishi Sunak has frozen the IHT nil rate band and residence nil rate band at £325,000 and £175,000, respectively, until 2026, while the value of homes has rocketed – potentially drawing more people into paying this tax.
Estates that exceed these allowances face paying 40 per cent IHT on anything above these amounts.
Given this freeze and rising house prices, it should come as no surprise that the latest IHT receipts totalled £3.6 billion between April and October this year, up from £3 billion in the same period last year.
What is IHT?
IHT is a tax on the estate (the property, money and assets) of someone who’s died. There’s normally no IHT to pay if:
- The value of your estate is below the £325,000 tax-free nil rate band allowance.
- You give away your main home to your children (including adopted, foster or stepchildren) or grandchildren, as the additional residence nil rate band increases your overall allowance to £500,000.
Any unused allowance can be passed to your partner after your death, if you are married or in a civil partnership. This could mean that a couple could pass on as much as £1 million tax-free if they make full use of the allowances on offer.
What are the rates for IHT?
The standard IHT rate is 40 per cent and it’s only charged on the part of your estate that’s above the threshold.
So, if your estate is worth £500,000 and your tax-free threshold is £325,000. The IHT charged will be 40 per cent of £175,000 (£500,000 minus £325,000).
The estate can pay IHT at a reduced rate of 36 per cent on some assets if you leave 10 per cent or more of the ‘net value’ to charity in your will.
Are there any ways to save on IHT?
You can give up to £3,000 per year per person to a beneficiary without it being subject to tax after death.
If you haven’t previously given a gift in the preceding tax year then you can backdate it and make a gift of £6,000 in a single tax year.
Any gifts over this amount you give to beneficiaries while you’re alive may be taxed after your death, depending on when the gift was made.
Under the seven years rule, a ‘taper relief’ is applied that might mean the IHT charged on the gift is less than 40 per cent on a sliding scale.
Other reliefs, such as Business Relief, allow some assets to be passed on free of IHT or with a reduced bill, while trusts can help to pass on wealth tax-free.