On Tuesday 9th October Alistair Darling, the Chancellor of the Exchequer, announced his Pre-Budget Report. The report generated lots of press coverage, especially about inheritance tax, but some of the changes may have left individuals wondering what, if anything, the changes mean to them. To help make things clearer, www.moneybasics.co.uk has come up with a list of frequently asked questions. If you have any other questions, please feel free to Contact Us.
Inheritance Tax (IHT)
Q: What is inheritance tax?
A: A tax paid by the beneficiaries of an ‘estate’ after a relative has passed away. An ‘estate’ is, broadly speaking, the total value of everything you own at the time of your death, including your house, minus what you owe.
Q: How much do payers of inheritance tax get charged?
A: The inheritance tax rate currently stands at 40%. It is paid on the difference between the value of the estate and the IHT threshold of £300,000. So if someone leaves £1million after they die then IHT is paid on the amount over the threshold, ie £700,000. So £280,000 would be paid in IHT.
Q: Who pays inheritance tax?
A: With immediate effect, the inheritance tax threshold has been doubled for married couples and civil partnerships from £300,000 to £600,000. You now only pay IHT if the value of your inherited property exceeds £600,000. This has removed the need for more than 2.4 million homeowners to pay IHT. Currently around 6% of the population are liable for IHT though after the changes this figure will fall.
Q: Has the inheritance tax threshold been raised just for married couples and civil partnerships?
A: Yes. Unfortunately, if you are a cohabiting couple, in a non-civil partnership relationship, are living with a sibling or are single, you don’t benefit from them increased IHT threshold. So if your total estate, including the value of your house and any savings is worth more than £300,000, your partner/sibling or other beneficiaries will have to pay 40% IHT on the amount over 300,000 that they inherit from you.
Q: Why has the threshold been raised?
A: When inheritance tax was first introduced, it was designed to tax the super-rich. While house prices have more than tripled over the last ten years, the inheritance tax threshold has not been increasing at the same pace. This has led to many more people paying IHT – people that the tax was not designed for!
Q: What is likely to happen to inheritance tax in the future?
A: Alistair Darling has promised that the threshold for couples will be raised further – to £700,000 – by 2010. The Chancellor has also said that in the future IHT thresholds will take into account both house prices and inflation.
Q: I have already lost my partner, can I still take advantage of the increased threshold?
A: Yes, the change in threshold will be backdated indefinitely.
Q: What’s happening to child maintenance?
A: The amount of child maintenance that a family can receive without it affecting their family benefits will double to £20 per week from next year.
Q: What is going to happen to child maintenance in the future?
A: The Chancellor has stated that the maximum amount of child maintenance that can be received without it affecting the family benefits will be raised again to £40 per week by 2010.
Q: What is the Child Tax Credit (CTC)?
A: It’s a means-tested allowance for parents and carers of children or young adults who are still in full-time non-advanced education or approved training. You don’t have to be the child’s parent to be eligible but you must be the main person responsible for them. It is important to note that it is a credit, not a benefit. If your income goes up by more than £25,000 during the tax year (which starts on the 6th April,) HM Revenue & Customs will claim back some of the tax credit they gave you at the start of the year.
Q: If I receive the Child Tax Credit, do I lose out on Child Benefit?
A: No, Child Tax Credit is paid in addition to Child Benefit.
Q: What’s happening to Child Tax Credit?
A: From April 2008, the child element of the Child Tax Credit is being increased by £175 a year. For each child where you are deemed to be the main person responsible for them, you may be entitled to receive an additional £175. Whether you receive all of it, some of it, or none of it depends on your income if you are single, or the joint income of you and your partner.
Q: What is going to happen to Child Tax Credit in the future?
A: From April 2010 there is going to be further £25 a year increase in Child Tax Credit available.
For further information on child maintenance you can call the Child Support Agency (CSA) National Helpline: 0845 7133 133.
For further information on tax credits you can call the Tax Credits helpline: 0845 300 3900.