A Landlord’s Guide to the Budget 2021 – Part 4

Recently, the Chancellor of the Exchequer Rishi Sunak delivered a ground-breaking UK Budget in the midst of the COVID-19 pandemic.  Welcome to our four-part series setting out what this Budget could mean for you when it comes to your properties and investments.

Welcome to the fourth part of our four-part series covering what the Budget could mean for you when it comes to your properties and investments.

Inheritance tax

In this Budget, tax thresholds for the pension’s lifetime allowance, inheritance tax and the annual exemption for capital gains tax will remain frozen until 2026.

Inheritance Tax is a tax on the estate (the property, money and possessions) of someone who’s died. The standard Inheritance Tax rate is 40%. It is only charged on the part of your estate that is above the threshold.

There is normally no Inheritance Tax to pay if either:

  • the value of your estate is below the £325,000 threshold
  • you leave everything above the £325,000 threshold to your spouse, civil partner, a charity or a community amateur sports club

For example, your estate is worth £500,000 and your tax-free threshold is £325,000. The Inheritance Tax charged will be 40% of £175,000 (£500,000 minus £325,000).

What is the nil rate band?

The nil rate band (NRB), also known as the inheritance tax (IHT) threshold, is the amount up to which an estate has no IHT to pay. Each person’s estate can benefit from the NRB. From 6 April 2017, a ‘residence nil rate band’ may be available in addition to the NRB. Any unused NRB and residence nil rate band may be transferred to a surviving spouse or civil partner. It is currently £175,000. The residence nil-rate band was due to rise with inflation in April 2021, but both thresholds have been frozen until 2026. It still means, however, that married couples and civil partners can give away up to £1m free of inheritance tax.

Each individual has their own NRB which is £325,000 for 2020/21 and this has been frozen in this Budget. Any part of the estate up to the NRB threshold is chargeable to IHT at a rate of 0%. Any part of the estate that exceeds the NRB threshold is usually chargeable to IHT on death at 40%.

The NRB applies to the taxable, non-exempt estate passing on death together with any taxable gifts made within the seven years before death.

Reliefs and exemptions

  • Some gifts you give while you’re alive may be taxed after your death. Depending on when you gave the gift, ‘taper relief’ might mean the Inheritance Tax charged on the gift is less than 40%.
  • Other reliefs, such as Business relief, allow some assets to be passed on free of Inheritance Tax or with a reduced bill.

Who pays the tax to HMRC

Funds from your estate are used to pay Inheritance Tax to HM Revenue and Customs (HMRC). This is done by the person dealing with the estate (called the ‘executor’, if there’s a will).

Your beneficiaries (the people who inherit your estate) do not normally pay tax on things they inherit. They may have related taxes to pay, for example if they get rental income from a house left to them in a will.

People you give gifts to might have to pay Inheritance Tax, but only if you give away more than £325,000 and die within 7 years.

For further information visit https://www.gov.uk/inheritance-tax

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