Could You Benefit From Changes To Inheritance Tax?
Changes To Inheritance Tax – Inheritance tax basics
When a person dies, inheritance tax is payable if that person’s estate, consisting of money, property and possessions, is deemed to be valued at more than the nil-rate band.
Since 2009 the nil-rate band has been set at £325 000, with anything above this being taxed at a rate of 40%.
If, when you died, your estate was worth £500,000, the first £325,000 would be free from inheritance tax, but the remaining £175 000 would be liable for IHT tax at 40%.
IHT can be reduced slightly to 36% on some of the assets, if the owner has left 10% or more to charity.
Any unused allowance could be transferred to a spouse or civil partner thus increasing the nil-rate band to £650,000 if the deceased did not use any of their own allowances (although this is very rare).
Read more in this article about ways to reduce your IHT liability.
There are ways of reducing your IHT liability such as making charitable donations and using gift exemptions.
From April this year people will also be able to use a nil-rate band of £100 000 on their residence (RNRB).
This only applies if the family residence is passed on to a direct descendant and is sometimes called the family home allowance.
This family home allowance is set to rise by £25,000 each year until 2020/2021 when it reaches £175,000. Beyond this time, it will still increase, but only in line with the CPI measure of inflation.
Any unused allowance from RNRB can also be passed to a spouse or civil partner.
Potentially a married couple or civil partnership could have a joint nil-rate band of £1 000 000 from April 2020.
However, there are exceptions that can affect your eligibility and tax planning.
Increases in the RNRB
Nil-rate tax band
Residence nil-rate band
Maximum nil-rate band
Married couples and civil partners
Changes To Inheritance Tax – Who can inherit?
RNRB is only applicable if you pass on the family home to a direct descendant.
This includes both your children and grandchildren and also includes:
- step children
- adopted children
- foster children
- guardian and special guardianship children.
If your family home is passed on to someone who is not a direct descendant, then you will be unable to make use of the RNRB allowance.
Changes To Inheritance Tax – Eligible property
The RNRB was put in place to help families pass on their family residence without incurring IHT, so there are eligibility rules in place to ensure that it is only used for this purpose.
If you own a single residential property that you have lived in, it will automatically qualify for the family home allowance.
If you own additional residential properties, the executor chooses which property to apply the allowance to, in order to make maximum use of the RNRB allowance.
Buy To Let property and property that you have never lived in are not eligible for the family home allowance.
Eligible property held a trust will qualify for the family home allowance provided that the trust beneficiary is a direct descendant.
The RNRB allowance is used against a property before the existing nil-rate band.
Jane is a single mum with two children. She dies in August 2017 and leaves everything she owns to her children. This consists of a £400 000 family home and £50 000 of other assets.
Currently, RNRB allowance can be claimed against the first £100,000 of her residence. This has the effect of reducing the value of her estate to £350,000.
After deducting the existing nil-rate band of £325 000, only £25 000 remains. This is the portion of her estate that is liable for the 40% inheritance tax, resulting in a bill of £10,000.
This is a simple example and does not explore other ways to reduce your IHT liability.
Our Talk to our Warrington Financial Advisor, Liverpool Financial Adviser, West Kirby Financial Advisor, Wilmslow Financial Advisor, Altrincham Financial Advisor or Manchester Financial Adviser team can help you work out your estate’s tax liability.
Changes To Inheritance Tax – Valuing your estate
If you have a large estate valued more than £2 000 000, the family home allowance will be tapered.
On high-value estates over £2 000 000, the RNRB will be reduced by £1 for every £2 above the threshold.
This means that in April 2017, there will be no family home allowance on estates that exceed £2 200 000 (assuming no unused RNRB has been transferred to a surviving spouse or civil partner).
As RNRB is set to rise each tax year, this figure will also rise, meaning that in 2020 individuals with a high-value estate worth more than £2 350 000 will not have any family home allowance available.
It is important to see how much your estate may be worth by estimating the market value of your possessions and property. The value of any debts is then subtracted from this figure..
This estimate should give you a rough idea of whether you fall into the bracket where you could be affected by tapering.
This is the ideal time to also review your will and gives you an opportunity to structure it in a tax-efficient manner to minimise your exposure to IHT.
For example, it may not be tax efficient to pass all your assets to a spouse or civil partner upon your death if it increases the value of their estate to over £2 000 000 when they die.
Even if you downsized or no longer own a home, you might still be able to take advantage of the full family home allowance.
Individuals will be able to pass on smaller, cheaper properties and/or assets up to the value of the full RNRB to direct descendants.
There are other conditions to meet to be eligible for this.
Changes To Inheritance Tax – Unused allowance
If your property is worth less than the family home allowance, the remainder of the RNRB cannot be used against other assets to reduce inheritance tax.
John owns a house worth £150,000. He dies in 2020/21 when the family home allowance is £175,000 and leaves the house to his children. His allowance is then £150,000 rather than £175,000.
Any unused allowance can be transferred to a spouse or civil partner, even if the deceased did not own a property at the time of their death.
This unused allowance is passed on as a percentage rather than an actual figure. On the second death, the unused RNRB allowance available is calculated according to the current RNRB.
The full RNRB could be transferred to a spouse or civil partner if they died before 6 April 2017.
The new changes to inheritance tax add complexity to estate planning but also offer potential to save tax. Talk to one of our Warrington Estate Planning, Altrincham Estate Planning, Manchester Estate Planning, Liverpool Estate Planning, Wilmslow Estate Planning or Knutsford Estate Planning specialist to review your own circumstances.
Important information about this Changes To Inheritance Tax article
The way in which tax charges (or tax relief, as appropriate) are applicable depends on a person’s own individual circumstances & and may be subject to change in the future.
FCA regulations apply to certain regulated activities, services and products, but does not necessarily apply to all tax planning activities and services.
This Changes To Inheritance Tax document is solely for info purposes and nothing in this article is intended to constitute advice or a recommendation.
While considerable care has been taken to ensure that the information contained within this Changes To Inheritance Tax article is accurate and up-to-date, no warranty is given as to the accuracy or completeness of any information.