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Inheritance tax is currently charged on a person’s estate – money, possessions and property – and is payable to HMRC. Currently, the tax rate is set at 40 percent, but it only has to be paid on the value of an estate above a set threshold. For the majority of Britons, this threshold stands at £325,000, although there are ways to increase this.
Perhaps the most popular is gifting the value of an estate above this threshold to certain groups and people, who are:
- a spouse
- a civil partner
- a charity
- a community amateur sports club
There is also no Inheritance Tax to pay usually if a person’s estate is valued below the £325,000 threshold.
Within a person’s estate often comes a house, as this is a significant purchase often with a hefty value.
Inheritance Tax is levied on property, and can count towards a person’s threshold.
But there are important rules to bear in mind when it comes to a home and how it will fare against IHT.
The government has laid out a rule, introduced in April 2017, known as the main residence nil-rate band which is likely to have implications on property.
The government website reads: “The measure will take effect for relevant transfers on death on or after April 6, 2017.
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“It will apply to reduce the tax payable by an estate on death; it won’t apply to reduce the tax payable on lifetime transfers that are chargeable as a result of death.”
The main residence nil-rate band can be thought of as an extra property allowance designed to assist people in passing on their homes.
If Britons choose to pass their home to their child or grandchild, they may be able to receive an extra £175,000 in tax-free allowances this tax year.
This is only applicable to direct descendants, though, so extended members of the family cannot be considered.
The amount could be substantial for many people, as coupled with the IHT threshold, it could shield their loved ones from a higher tax bill.
In the current tax year, taking into account the £325,000 threshold, couples could be exempt up to £1million.
For single people, the sum is halved to £500,000, but this is still a significant amount.
In attempts to avoid taxation for their loved ones, some people may choose to give away a home before they die.
However, there are specific rules to cover this, so there is no property loophole to be found.
Giving away a home seven or more years before a person dies usually means there will be no Inheritance Tax to pay.
But if a person does pass away within seven years, the property is considered under the gifting rules of IHT.
Those who wish to continue to live in their property after giving it away must pay rent at the going rate to the new owner, their share of the bills, and live there for at least seven years.
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