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18 October 2017

Inheritance Tax – Passing on your wealth

Death duty has been payable, in one form or another, for over 300 years but until comparatively recently, it was only of concern to the wealthiest in society. For example, following the introduction of estate duty in 1894 (the forerunner of the current inheritance tax), many landed estates were broken up, as landowners could not afford to pay the tax.

Inheritance tax commenced in 1986 and is payable at 40% of the amount by which the value of a deceased person’s estate exceeds the “nil rate band”.

No longer a tax on the wealthy

The inheritance tax nil rate band in 1986 was £71,000 and has increased most years, to allow for inflation, so that by 2009, the nil rate band was £325,000.

However, due to the boom in property prices, particularly in London and the South East, increases in the nil rate band did not keep pace with increases in house prices. It was not long before the estates of people whose main, or only, asset was a modest house began to exceed the nil rate band. Although spouses and civil partners each had their own nil rate band, they would have had to make complex Wills containing “nil rate discretionary trusts” in order to make use of both bands.

£1 million nil rate band?

 As far back as 2007, the Conservative Party pledged to increase the inheritance tax threshold to £1 million. In October of that year, the transferable nil rate band was introduced, which meant that spouses and civil partners would effectively be able to use their combined nil rate bands, without the need to make special Wills.

During the Coalition Government, however, plans to increase the inheritance tax nil rate band were abandoned and the nil rate band has been frozen at £325,000 since 2009 and will continue to be frozen until April 2021.

Even a double nil rate band is insufficient to cover the value of many, quite modest houses in the London area, meaning that the family home may have to be sold in order to pay the tax. Perhaps mindful of this, in the Summer Budget 2015, the Government announced the introduction of a new main residence nil rate band, which will give spouses and civil partners a combined nil rate band and main residence nil rate band, totalling £1 million, by April 2021.

Do we need to worry?

Although on the face of it inheritance tax would appear to be quite a simple concept, as with all taxes, the devil is in the detail. You cannot assume that, if your estate is under £1 million (£500,000 if you are not married or in a civil partnership), you do not need to consider inheritance tax.

There are now four elements to the nil rate band on the death of the survivor of a couple: their individual nil rate band and main residence nil rate band; and the transferable nil rate band and transferable main residence nil rate band of the first to die.

Where one of a couple has previously been widowed, there may be further tax-saving opportunities; conversely where one of a couple has foreign domicile, spouse exemptions are limited, so you need to take advice.

Watch this space

 Details of how exactly how the new main residence nil rate band will apply (e.g. where the home is left on trust, amongst other things) are still being drafted, however:

  • It is being phased in, starting at £100,000 from 6 April 2017 and rising by £25,000 annually until 2021;
  • It will not apply if you have never owned a home, or if you ceased to own a home before 8 July 2015;
  • It only applies if your home (or assets of equivalent value, if your home was sold on or after 8 July 2015) pass on your death to direct descendants i.e. children, including adopted, step and foster children and their descendants;
  • It will be reduced by £1 for every £2 of the net value for estates above £2 million.

Please contact us if you require further advice on inheritance tax.

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