Little-known tax rule means you will get big HMRC bill if you have this many children | Personal Finance | Finance
Families have been warned they could end up paying an extra £70,000 in tax because of a little-known HMRC rule.
As more and more people become liable for inheritance tax , there is a particular allowance a person may think they qualify for and yet it doesn’t apply to them.
Each person has a standard tax-free allowance that means they can pass on up to £325,000 in total assets without paying the 40 percent tax on the amount, but you also get an additional allowance of £175,000 if you are passing on your main residence.
However, the rules state you can also get this extra allowance if you pass on a qualifying residence on death to a “direct descendant”.
This means if you do not have any children to pass on your estate to, you could miss out on the allowance, meaning the 40 percent tax would apply to an extra £175,000 of your estate, increasing your successor’s bill by £70,000.
As well as your children, grand children, foster children and step-children also count as direct descendants. You can pass on any unused individual allowances to your spouse or civil partner when you die, meaning their allowances can effectively double.
So when the second partner dies, if they do not have a direct descendant, they could miss out on £350,000 in allowances, meaning the inheritors would pay an extra £140,000 in tax.
However, some experts are calling for this policy to be reformed. Hudda Morgan, private wealth partner at law firm Spencer West, said the residential nil rate band should be expanded “to all estates whoever you are leaving your estate to”. She said: “Why should people without children be penalised?”
Lorraine Wilson, principal associate at law firm Weightmans, also called for reform to the tax as the system is “complex” at present.
She warned: “There are different allowances for different situations and plenty of small print. For example, a couple leaving their family home to their children might assume it falls outside of inheritance tax, only to find they’ve breached the residence nil-rate band rules.
“Similarly, someone giving away assets late in life may not realise that gifts made within seven years of death can still be taxed.
“A simpler system, with one clear threshold and consistent treatment of assets, would help families understand where they stand and avoid being caught out by technicalities.
“It should be easier to pass on savings or a home without needing professional advice just to navigate the rules.”
Labour has set out plans for pensions to become subject to inheritance tax from 2027. However, the Government has yet to explain exactly how this will work and who will be impacted.
