Summary
The Finance Bill 2016, which received Royal Assent on 15 September 2016, contains changes to inheritance tax (IHT). The new measures, which will apply from April 2017, provide for an additional tax-free threshold known as the Residence Nil Rate Band. Both married couples and civil partners are treated as individuals, each allowed to pass on their full allowance. This allowance is also transferable even if one partner dies before April 2017. By 2020 / 2021, it will be possible for civil partners and spouses to provide a tax-free inheritance to their “linear” descendants, up to £1m.
Current position
Currently, IHT is payable on death at the rate of 40% on the value of an individual’s net estate above the current Nil Rate Band of £325,000. A gift between spouses or civil partners is exempt from IHT ((however, subject to limited exceptions, if you die within 7 years of making the gift, its value is added to the value of your estate on death). On the death of a surviving spouse or civil partner, where the Nil Rate Band of the first to die has not been not used, it is possible to transfer this to the survivor’s estate so that the combined total Nil Rate Band will be £650,000. If the estate of a married couple or a civil partnership exceeds £650,000, tax will usually only be paid on the excess.
New IHT measures from April 2017
From April 2017, the extra allowance (Residence Nil Rate Band) will be £100,000, increasing by £25,000 each year until it reaches £175,000 per person. Added to the £325,000 Nil Rate Band, this means a new allowance for property owners of £500,000 or £1m for couples using their transferable Nil Rate Band mentioned above. This total must include the family home (or the house you live in / have lived in at some point during your life time), and it must be the main property. Buy-to-let and second properties will add to the total size of the estate as normal.
Further, in order to qualify for the new allowance, you must leave that property to “linear” descendants, which include children, stepchildren, adopted and foster children, grandchildren, etc. This list is exhaustive and relatives including aunties, uncles, nieces and nephews are not included.
For unmarried couples, or for those who do not leave any ‘liner descendants’, the Nil Rate Band of £325,000 is now frozen to at least April 2021. If the estate of the person leaving the property to the children is over £2m, then the new Nil Rate Band is tapered away, at a rate of £1 lost for each £2 left over £2m.
How we can help
It is important to start IHT planning as early as possible to ensure that your wishes can be followed with a minimum of tax becoming payable. Following a divorce, or a significant change to your family, a creation, or change of your Will may be necessary, Contact our private wealth team to find out more about how we can help preserve your estate for the future.
Gillian Coverley, a partner and specialist in wills trusts and estates planning at Irwin Mitchell, explains further the consequences of these changes. >
Published: 30 January 2017
Winter 2017
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