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 will introduce 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