In the same way that turkeys might avoid thinking about Christmas, there is a tendency for individuals to avoid thinking about Inheritance Tax (IHT) and the inevitable circumstances that make it relevant.
However, individuals ought to make themselves aware of a number of changes to IHT announced over the past 18 months that have significant impact on the Inheritance Tax regime, and the potential for effective IHT planning that they create.
The changes include introduction of the new main residence nil rate band, effective from April 2017, and follow the Conservative party pledge in 2015 to remove the family home from IHT by increasing the threshold to £1m as part of its then election manifesto.
Burden for families
The new residence allowance is good news for most and should help reduce the IHT burden for families, particularly as IHT payable on estates has increased by an average of 12% year on year since 2009/10. This was primarily due to rising asset values (Source: Office of National Statistics).
Currently, IHT is payable at 40% on the estate value above the IHT tax free threshold of £325,000 after deducting liabilities, reliefs or exemptions. In 2017/18 an enhanced allowance will start at £100,000 and increase by £25,000 each year until it reaches £175,000 in 2020/21. This is in addition to the existing £325,000 nil rate band. By 2020/21 married couples can potentially pass assets in an estate up to £1m without paying IHT. Whilst this sounds like good news it won’t apply to everyone.
If an individual owns more than one residential property the executors can elect which property qualifies for a new residence allowance. This only applies to one residential property in the estate at death occupied as the individual’s residence at some stage. The qualifying residence must pass on death to a direct descendant (children, grandchildren, step-child, adopted or foster child).
Where an individual’s estate exceeds £2m the residence allowance is restricted by £1 for every £2 that exceeds the £2m limit. The value of the estate for determining the £2m limit is before exemptions and reliefs such as Business Property Relief (BPR). Therefore, individuals with valuable assets qualifying for BPR may find that they will not qualify for the enhanced residence nil rate band due to tapering.
The unused residence band on the first death can be transferred to a surviving spouse/civil partner. This will also be the case if the first death took place before 6 April 2017 and irrespective of whether the deceased owned a residential property on death pre April 2017. Special provisions apply where an individual downsizes or sells their home after 8 July 2015. In general the residence band should be available on death providing the replacement property or assets form part of the estate and pass to direct descendants.
In conclusion individuals should review assets in their estate including existing wills to plan and take account of their changing circumstances together with new legislative changes.