You should consider the following questions in regards to Inheritance Tax;
What will I pay?
Inheritance Tax (IHT) is a levy that is to be paid on any estate over the value of £325,000 for a single person or £650,000 for a couple these are known as the Nil Rate Bands. Upon death, if the estate including any assets held in trust and any gifts made within seven years of death is more than the previously stated threshold, then 40% of Inheritance Tax is due over the Nil Rate Band.
A charge to IHT arises when someone dies or when assets transferred are to a Discretionary Trust or to a Company. Inheritance Tax will only be payable if the estate on death or the value of the assets transferred is more than the IHT threshold of £325,000. When IHT is payable, the tax must be paid before the probate registry will issue a grant of representation.
The Government have introduced a new IHT nil rate band of up to £175,000 where the family home is passed to children or grandchildren. This is in addition to the current nil rate band of £325,000 which has been frozen since 2009 and will remain frozen for the next 5 tax years, until the end of 2020/21.
Who will benefit
The extra nil rate band will be fully available to anyone who:
· passes the family home to their children or grandchildren on death; or
· or had a family home, then downsized (passing on assets of equivalent value to children/grandchildren); and
· has an estate below £2M.
However, the full £175,000 won’t be available until 2020/21. The allowance will first become available in 2017/18 at £100,000 and increase to £125,000 in 2018/19, £150,000 in 2019/20 and £175,000 in 2020/21. It will then increase in line with the Consumer Price Index (CPI).
Like the existing nil rate band the new property nil rate band can be transferred between spouses or civil partners. This means a married couple could pass £1M in 2020/21 to their children tax free on death provided the family home is worth at least £350,000, saving £140,000 in IHT.
Who may miss out
But not everyone will benefit from the additional IHT free allowance. Anyone with a net estate over £2M will begin to see their property nil rate band reduced until it is completely lost once the estate is over £2.2m (2017/18) £2.25m (2018/19), £2.3m (2019/20) or £2.35m (2020/21).
It will only apply to transfers to children and grandchildren. Meaning those without children will miss out. And it is not possible to use the exemption for lifetime transfers which may discourage some clients from passing on their wealth during their lifetime.
Clients who could benefit from the property nil rate band may need to revisit their existing wills to ensure they continue to reflect their wishes and remain as tax efficient as possible.
Current NRB £325,000
Property NRB £100,000 2017/18
Total available £425,000 2017/18
Current NRB £325,000
Property NRB £125,000 2018/19
Total available £450,000 2018/19
Is there any avoiding the tax?
Inheritance Tax has traditionally been seen as a tax only for the very wealthy. However, with a threshold of £325,000 and £100,000 for RNRB for the current 2017/2018 tax year, and the price of houses still relatively high, more and more people are finding themselves liable for this tax. This could lead to beneficiaries of estates paying significant tax bills, that with a little bit of forward planning, could be mitigated.
Here at Thornton & Baines, we consider ourselves to be experts in the field of Inheritance Tax and would be happy to help you in anyway possible with any issues you may have regarding this tax, along with any other financial thoughts you might have. We have a number of advisers who are trained to the highest professional capacity and are available at any time to answer your queries and put your mind at rest. We are aware how important your finances and your future are to you, which is why we are here to help in every possible way.