Death is not a subject we find easy to discuss and could be the reason that Inheritance Tax planning is often not given the prominence it deserves. Let us also not forget that Inheritance Tax charges can arise during a person’s lifetime as well as at the time of death.
Inheritance tax affects individuals who have an estate with total assets above the Inheritance Tax nil rate band, which is currently £325,000. For many the recent surges in residential house values is placing estate values firmly above the present nil rate band. Inheritance tax is payable on everything you leave in your estate in excess of the nil rate band at a rate of 40%. Please note transfers between married couples and civil partners are except from this tax.
In 2010 the then Chancellor indicated that the government would wish to increase the IHT threshold to £1,000,000 but other members of the coalition government caused the allowance to remain frozen at the 2009 level of £325,000.
However after the last election the Chancellor was able to introduce the idea of a main residence nil rate band which applies to when a residence is passed on death to a direct descendant such as children and grandchildren. This is to be in addition to the present nil rate band of £325,000.
This new nil rate band is to be phased in from April 2017 and will be
£100,000 in 2017 to 2018
£125,000 in 2018 to 2019
£150,000 in 2019 to 2020
£175,000 in 2020 to 2021
The residence nil rate is then planned to increase in line with the Consumer Prices Index. As is presently available any unused nil rate band will be transferred to the surviving spouse.
The Residence Nil rate band will also be available when an individual downsizes or gives up house ownership on or after 8th July 2015. So any move into residential care or sale of your main residence will not prevent you from utilising your residence nil rate band.
The residential nil rate is limited to one property and will not be an allowance per property. There will be scope to nominate which residential property will qualify should there be more than one property in the estate. However properties designated as buy to let will not qualify for main residence nil rate.
This new nil rate band takes effect on transfers on death after 6th April 2017. It will have the effect of reducing the estates tax liability.. It will not apply on lifetime transfers which are chargeable as a result of death. This nil rate band is transferable to the surviving second spouse or civil partner regardless of when the first spouse (civil partner) passed away.
So by the year 2021 a married couple will be able to claim a total inheritance tax allowance of £1,000,000 and this benefit stays with the surviving spouse or civil partner.
These new allowances will have the effect of removing many more estates from the liability to IHT. However the taxman is not generous to the extreme and the new main residence allowance is progressively to be withdrawn once a couple’s estate, with the inclusion of their main residence, is worth £2,000,000 or more. The withdrawal is at the rate of £1 for every £2 over the £2,000,000 limit. When a joint estate is worth £2,700,000 the effect will be a complete removal of the main residence tax allowance meaning the estate would only have the standard nil rate allowance of £325,000 per person.
Lifetime Inheritance Tax planning need not be complicated. It is possible to make important Inheritance Tax Savings by making use of regular reliefs and exemptions.
Everyone is eligible to a nil rate band threshold
- Chargeable lifetime gifts that do not exceed the nil rate band presently set at £325,000 may be exempt from inheritance tax liability.
- There is an annual exemption of £3,000 and if not used this allowance can be carried forward to the following year.
- Lifetime gifts from an individual to another are termed potential exempt transfers. A potential exempt gift made more than seven years before death becomes an exempt transfer
- If may be possible to reduce your estates value by making gifts out of “normal” To qualify for exemption it must be shown that a transfer of value meets three conditions
- The gift must form part of the transferor’s normal expenditure
- The gift would be made out of income.
- The gift must not impoverish the transferor in any manner.
Tax mitigation must never take precedence over ones personal and financial needs however if you have something you want to leave then your first course of action would be to ensure you have a current, properly constructed Will in place having sought the advice of a Solicitor.. Once this is in place you should then look to seek qualified professional assistance to position and plan the management of your estate in such a manner as to reduce or negate any inheritance tax liability.
The amounts of inheritance tax collected by the revenue have been increasing each year and the revenue are secure in the belief this increasing tax take will continue. Which is strange as inheritance tax is for most people a voluntary tax.