Inheritance tax receipts have reached record highs – £5.4bn in 2018-19 – and more of us than ever are paying the dreaded tax. Both the number of estates liable to pay the 40pc death toll and the Treasury’s annual haul have increased every year for a decade.
More than 28,000 people were forced to pay in 2016-17, the latest figures available, and the average bill costs families passing wealth down to their children and grandchildren around £180,000.
Middle class families sitting on vast property wealth thanks to steadily increasing prices over recent years but who have few other assets may find it difficult to satisfy the taxman without selling the family home.
This is despite new allowances that allow you to pass on more when you die.
So how do you calculate what you have to pay, who exactly qualifies for these new protections and how has the system changed?
How does inheritance tax work?
Each individual is taxed at a rate of 40pc on all their assets above a threshold.
At the moment this threshold is £325,000, but from April 2017 a new, higher threshold including a “family home allowance”, began to be phased in.
The taxman raked in £5.4bn from the death tax last year and expects its haul to total £7bn by 2023.
How has it changed?
The 2015 Budget introduced the new provision, allowing individuals and married couples to pass on their main home with added protection from the taxman.
The allowance began to be phased in at £100,000 in 2017-18, increasing to £125,000 in 2018-19, to £150,000 in 2019-20, and finally to £175,000 in 2020-21. This means that married couples will eventually be able to pass on estates worth up to £1m to their heirs.
However, the catch is that this total must include a “family home”, which must be the main property, and the property must pass to a direct descendant.
Buy-to-let and second properties will add to the total size of the estate as normal.
Estates over £2m lose the relief at £1 for every £2 over the threshold. Your estate will have no "family home allowance" at all if worth over £2.2m.
What if I downsize?
People who sell an expensive property will be eligible for an “inheritance tax credit” so can still qualify for the new threshold, as long as most of the estate is left to descendants.
How will this affect my tax bill?
Recent changes are helping to bring down costs for all estate sizes including family homes. Small estates are still exempt from inheritance tax and larger estates worth £1m that include family homes will have up to £140,000 extra tax-free allowance by the time the full home allowance is completely phased in.
However, the additional allowance will be gradually withdrawn for properties worth more than £2m.
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