Inheritance Tax planning is often something which people put off. However, it’s important to understand the tax allowances and reliefs for Inheritance Tax purposes in order to take advantage of:
- the short term opportunity of using your annual allowances (available on a “use it or lose it” basis) to make modest gifts;
- the lifetime opportunity of making significant gifts and surviving seven years for the Potentially Exempt Transfers to fall out of your estate for Inheritance Tax purposes; and
- the longer term opportunity of leaving legacies in your Will to utilise reliefs such as Business Property Relief or Agricultural Relief so that no Inheritance Tax is payable on parts of your estate.
In this post, we take a look at some of the more recent changes to the provisions which you now need to consider as part of your IHT planning.
IHT nil rate band
The nil rate band has remained at £325,000 since April 2009 and is set to remain frozen at this amount until April 2021. Inheritance Tax is currently due on any assets over £325,000 and the rate of tax is 40%.
There’s normally no Inheritance Tax to pay if either:
- your estate is worth less than 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.
If you’re married or in a civil partnership and your estate is worth less than the threshold, any unused threshold can be added to your partner’s threshold when you die.
IHT residence nil rate band
From 6 April 2017, a new nil rate band, called the “residence nil rate band” (RNRB), has been introduced, meaning that the family home can be passed more easily to direct descendants on death.
The RNRB is being phased in. For deaths in 2018/19 it is £125,000, rising to £150,000 in 2019/20 and £175,000 in 2020/21. Thereafter it will rise in line with the Consumer Price Index.
There are a number of conditions that must be met in order to obtain the RNRB, which may involve redrafting an existing Will.
Married couples and civil partners can also pass on anything which hasn’t been used of this tax-free allowance to their partner which means the surviving partner can currently pass on up to £900,000 tax free. This will rise to £1 million for couples in 2020.
Unfortunately, if your property is worth between £1 million and £2 million, slightly different rules apply and you lose £1 of your main residence nil rate band allowance for every £2 of value over £2 million.
The RNRB may also now be available when a person downsizes or ceases to own a home on or after 8 July 2015 where assets of an equivalent value, up to the value of the residence nil rate band, are passed on death to direct descendants.
Changes to IHT RNRB
Amendments have been introduced to the RNRB relating to downsizing provisions and the definition of ‘inherited’ for RNRB purposes. These amendments clarify the downsizing rules and provide certainty over when a person is treated as ‘inheriting’ property. The changes have effect for deaths on or after 29 October 2018.
Minimizing your IHT liability
There are lots of different ways to pass on your assets and thereby minimise your IHT liability and take full advantage of any reliefs and allowances. These include making a gift, leaving a legacy, setting up a trust fund (perhaps for school fees or for grandchildren) or taking out an insurance policy. Whatever you decide is right for you, you should always consider what tax implications it will have, either before or after your death.
Office of Tax Simplification (OTS) review of Inheritance Tax
The OTS is undertaking a two-part review of Inheritance Tax in response to the request from the Chancellor of the Exchequer in January 2018.
The first report has been produced and it says too many people have to fill in Inheritance Tax forms, and the process is complex and old fashioned. They have reached this conclusion as whilst Inheritance Tax is payable on less than 5% of the estates of the 570,000 people who die in the UK each year, around half of the deceased’s relatives have to fill in the forms.
There was also a concern that many individuals had worried about Inheritance Tax during their lifetime, even though it was not going to affect them. The second report is due in Spring 2019.
Please get in touch
The above outlines the basic provisions of Inheritance Tax. The rules and calculations can be complex and are subject to change. If you think you may be liable for Inheritance Tax or wish to minimise your liability, you should take professional advice. Please get in touch if you’d like to know more.