In 2015 the Chancellor of the Exchequer, George Osborne, announced a major change in Inheritance tax which added on an extra element for family homes which were left when someone died. This amount was tapered starting in 2017 and the last part of that increase is happening in 2020/21.
In addition to the standard rate of Inheritance tax relief, which sits at £325,000, an allowance for family homes that are passed on to direct descendants (children and grandchildren) was also introduced which started at £100,000 in 2017 and increased to £175,000 for the tax year 2020/21.
So this tax year (2020/21) is the final year of the major increases to the property portion of the allowance, that finish up with a total allowance of £500,000.
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The Inheritance Tax Allowance can be passed between couples, so that when the first partner dies the unused part of that allowance is passed on to the surviving spouse. When the second spouse dies the allowance can effectively be doubled.
For example spouse 1 dies and does not use any of his Nil rate band (perhaps he passes everything to his spouse and has not made any bequests to anyone else).
He can then pass his £325,000 allowance on to his wife. She will then have an allowance of £650,000.
The same thing can happen with the property part of the allowance that has not been used. This means that it is possible for the surviving spouse to have an allowance of up to £1m including the property allowance.
Obviously you need to check all of your details with your tax adviser to see what the situation is for your individual circumstances.
A question regarding the property part of the IHT allowance. I understand that at death the allowance can pass to the surviving spouse. If, however, the surviving spouse sells the property before they die is the property allowance still valid ?
Hi Adrian, and apologies for the delay in replying. As I understand it, it doesn’t matter whether it is the same property that was left by the spouse who dies first that is used by the transferred property allowance. There are also some special rules that can apply if they downsized and you can find more information on how they can use the transferred amount here.
I am the Executor of a friends estate who recently passed away
Her main assets will be passed to 2 step daughters, never legally adopted, and the are US citizens living in the USA.
My question is do they have to pay inhertitance tax in the uk or USA and at what level
Apologies for the delay in replying Brian. We cannot give financial advice here so I recommend you speak to a qualified person but as we understand it, inheritance tax is paid on the estate regardless of who are the recipients, so it just depends on whether the deceased lived in the UK or not.
Can you please tell me how is inheritance tax allowance is recorded. For example, probate was not required, after I die where is the record of both my wife’s and my allowances recorded for the executor?
Hi Bryan, I am not sure I entirely understand your question, sorry, and again we cannot give any tax advice here so you should consult a tax advisor for definitive answers on tax questions. The executor should keep records after a person’s death so when the first person dies the executor for that estate should have records – it is recommended that records are kept for a number of years as they may be needed in future years – the minimum recommendation seems to be 3 years but it may be prudent to keep the key documents for longer.