Inheritance Tax – Put Your House On It
It was way back in 2008 that the then shadow chancellor, George Osborne, announced proposals to raise the rate at which inheritance tax became payable by individuals to £1million. Seven years on and the wheels are now in motion, or are they?
What is the nil rate band?
The nil rate band is the total amount of your estate which can be left without inheritance tax becoming payable. Some transfers on death, such as those to your spouse or civil partner, or to registered charities are always free from inheritance tax. In addition, some qualifying business and agricultural assets, for example, are also exempt. For non qualifying assets and for transfers to people other than a charity, your spouse or your civil partner inheritance tax will become payable after you have used up your nil rate band.
The current nil rate band is £325,000 per individual or £650,000 for a married couple. With rising house prices in the UK, increasing numbers of individuals and married couples are finding themselves subject to inheritance tax.
What is changing?
Having won a clear majority at the last election, the conservative government has now set out how they plan to deliver on the promise of a £1million nil rate band.
Firstly, some caveats. The nil rate band will effectively remain at the same level i.e. £325,000 for individuals and £650,000 for married couples. To get to the £1million promised, an additional nil rate band will apply, but only in certain circumstances.
When will it apply?
The additional nil rate band will apply against the value of your residence only when your residence is passed on death to a direct descendent. A direct descendant is your child (including a step-child, adopted child or foster child) and your lineal descendants (e.g. grandchild).
How much will it be?
The additional nil rate band will be:
• £100,000 in 2017/2018;
• £125,000 in 2018/2019;
• £150,000 in 2019/2020; and
• £175,000 in 2020/2021.
Thereafter, it is due to increase in line with inflation. Like the current nil rate band, the additional nil rate band can be passed on to your spouse or civil partner. That’s where the £1million is comes into play. By 6th April 2020 a married couple could potentially have £650,000 in nil rate band and a further £350,000 of additional nil rate band (£175,000 each). The nil rate band itself will effectively be frozen until 2021.
What if I downsize or sell my property?
It is conceivable that you might own a smaller property at the date of your death than you do now. You may not even own a property at all. If the additional nil rate band is only applicable against your residence then this seems to encourage investing in and retaining a large main residence.
To avoid the need to hang on to your home for tax planning purposes, it is proposed that if you downsize or sell your property on or after 8 July 2015 then the difference in value between old and new will still be available to you in the form of the additional nil rate band, provided that you leave the new downsized property or assets of an equivalent value to your direct descendants. How this will work in practice is yet to be announced so watch this space for further announcements.
Will it definitely apply to me?
If your estate is less than £325,000 or £650,000 for a married couple, then the additional nil rate band will not apply.
On the other hand, there will be a tapered withdrawal of the additional nil rate band if your estate is worth more than £2million. This means that, if you do have an estate worth £2 million or more, you will lose £1 of the additional nil rate band for every £2 you are over the £2 million mark. The net effect of this is that if your estate is worth £2.7 million or more in the tax year 2020/2021 then you will not see any benefit from the additional nil rate band.
When is all of this going to happen?
The additional nil rate band is due to apply to all deaths after 6th April 2017.
Confused?
How the additional nil rate band will work in practice remains to be seen. An increase in the nil rate band is welcome although it is obvious that this change comes with complexities. The effect of the new rules will mean that you will need more bespoke advice depending on your current financial situation to see whether and how the new rules might apply.
It is important to remember that these rules will not come into play for nearly two years. In the meantime, there are other effective ways to plan against the imposition of inheritance tax on your estate. It is important that you consider all of the options that are available to you and take into account the forthcoming change in the rules when inheritance tax planning.
At GA Solicitors we are well placed to provide you with comprehensive advice on inheritance tax planning.
Our dedicated, qualified and understanding team will be pleased to meet with you. Many members of our wills, trusts and probate team are also members of the Society of Trust and Estate Practitioners and Solicitors for the Elderly.
Contact our wills, trusts and probate team on 01752 203500.
Matthew Rose, Associate