Updated: Jul 17, 2020
Your 2020 Update
The 6th of April sees the start of the new tax year and with a new tax year comes new tax rules, including the dreaded Inheritance Tax.
However, we have some good news! This year the residence nil rate band has been increased to £175,000 meaning that, as of 6 April 2020, most married couples will be able to leave £1 million without paying any inheritance tax.
What is Inheritance Tax?
Inheritance Tax is a hot topic, mainly with people not wanting to pay it, or more accurately not wanting their beneficiaries to pay it after their death. The great publicity which often surrounds Inheritance Tax is, however, surprising when you consider that only 5% of estates of people who die are subject to Inheritance Tax.
Everybody has a nil rate band of £325,000. This means that if your estate (the value of everything that you own) is less than £325,000 there will be no inheritance tax to pay.
If you are married or you have entered into a civil partnership, you can transfer your nil rate band to your spouse. This means that usually there will be no inheritance tax to pay on the first death. Then, when the second person passes away, their Estate can claim their spouse's nil rate band as well as their own. This means that their Estate could have up to a £650,000 tax-free allowance.
You must be married or have entered into a civil partnership. There is no such thing as a common-law husband/wife.
Any value over this would potentially be taxed at 40% if no further exemptions are applicable, such as the residence nil rate band.
The transferable nil rate band may be reduced in value if on the first death some gifts or part of the Estate were left to other Beneficiaries who are not exempt such as children, other relatives or friends.
So, if you are married and you have an estate worth up to £650,000 in most cases there will be no inheritance tax to pay.
The Residence Nil Rate Band
As of April 2017, if you own a property (or shares in the property) and you are leaving it to their direct descendants (usually children, grandchildren, step-children or foster children) are entitled to an additional tax-free amount. This is called the Residence Nil Rate Band and it effectively increases the threshold for Inheritance Tax.
As of 6 April 2020, the residence