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Government receipts from IHT have risen sharply too. The Treasury received over £4 billion from this tax in 2015-16, up 22 per cent on the previous tax year.
Changes in the rules introduced from April mean that families will have the new main residence nil-rate band available to them when calculating their tax liability. However, as the new allowance is to be phased in between now and 2020, and doesn’t apply in every instance, many will still find their estates liable to IHT.
How does IHT work?
IHT is a tax payable on money, savings or any other assets you pass on when you die, and potentially on some gifts you make during your lifetime. The current threshold is £325,000 for an individual and a combined £650,000 for a married couple or civil partners. The unused individual nil-rate band can be passed to the surviving spouse or civil partner on death.
The amount of IHT payable is calculated after debts and funeral expenses have been paid, and is charged at 40 per cent. If the size of your estate means that it will be liable to IHT, you can reduce the rate at which it is payable by leaving at least 10 per cent of your estate to charity. This would mean that the rate of tax payable on the balance of the estate could be reduced from 40 per cent to 36 per cent but of course depending on how large your charitable legacy was originally, less would pass to your chosen heirs.
The new residence nil-rate band
From April, the new family home allowance, the residential nil-rate band, will apply if you leave a main residence to a direct descendant like a child or grandchild, including adopted, step or fostered children. It’s important to be aware that only direct descendants can benefit, meaning that it won’t, for example, be available where a main residence is left to nieces, nephews or cousins.
The residential nil-rate band will increase from £100,000 in the 2017-18 tax year, to £125,000 in 2018-19, £150,000 in 2019-20 before reaching £175,000 in 2020-21. When added to the existing threshold of £325,000 this would potentially mean an overall allowance of £500,000 by 2020 for those who are single or divorced, or a combined £1m for those who are married or in civil partnerships.
However, where an individual’s estate is worth over £2m, the family home allowance (but not the individual allowance of £325,000) reduces by £1 for every £2 of value over £2m.
Points to consider
Although a married couple could have a combined family home allowance of £350,000 by 2020, with the average residential property in the UK now worth around £220,000, and well over £350,000 in the South East, many family homes are likely to exceed the threshold. It’s been calculated that to reflect the real growth in asset values, the residential nil-rate band would need to be set at over £500,000. So, for those living in London and the South East, the new allowance will only ease, but not eliminate, their potential IHT burden.
In addition, the family home allowance can only be used against the main residence, so it doesn’t cover buy-to-let property; this would instead be set against the £325,000 personal threshold. However, it may still be possible to claim a proportion of the allowance where the family home has been downsized to below the residence nil rate band, or sold before death.
Every family’s circumstances are different, so taking professional advice on inheritance tax matters is essential.
For more information, please contact:
David Hartles, Private Client Principal
T 020 7554 3068