17th December 2015
In the first budget from the new Conservative government, the Chancellor has made good his earlier pledge to extend the inheritance tax nil rate band thresholds – allowing married couples or civil partners to potentially pass on up to £1 million tax free. The announced measure is designed to limit the number of estates affected by inheritance tax. Government forecasts had predicted that the estates of over 63,000 people in the UK would have fallen liable to pay inheritance tax liability by 2020 /2021. It is hoped that raising the threshold will reduce this to about 37,000 estates, which is the estimated level for the 2014/2015 tax year.
The current inheritance tax threshold is £325,000 per person. This threshold will be frozen until 2021.
Inheritance tax is paid at 40 per cent, on the value of the estate if it exceeds the inheritance tax threshold.
The chancellor has added an additional nil rate band of a further £100,000 per person for deaths on or after 6 April 2017 applied to the deceased person’s residence. This will be gradually increased up to £175,000, potentially giving homeowners an individual threshold of £500,000 each by 2021/2021.
Married couples and civil partners are allowed to pool their nil rate band thresholds together, provided they give the whole of their estates to each other on the first death, giving them a greater allowance on assets that they can pass on to their beneficiaries tax free on the second death. Under the chancellors reforms this could potentially allow a married couple to pass on up to £1 million worth of assets without paying a penny of inheritance tax by 2020/2021.
However, whether a married couple maximise the use of their full joint nil rate bands depends on how their wills are drafted, and the timing of gifts to children and other beneficiaries.
If they leave everything to each other in their wills, then the full joint nil rate bands can be applied on the second death. If, however, the wills give gifts to children or relatives, on the first death, then the allowance will be reduced by the amount of that gift.
Getting legal advice from an experienced wills solicitor is vital to ensure that your will reflects your personal circumstances and wishes as well as minimises inheritance tax.
The new additional threshold of £100,000 per person will only apply to deaths on or after 6 April 2017. From that date there will be an increase to the nil rate band – an Additional Nil Rate Band (ANRB) – which can be applied when a residential property is passed on to direct descendants of a deceased.
This means that for the tax year 2017/2018, a married couple could pass on to £650,000 to be applied to the value of their joint estate plus a further £100,000 each against the value of their residence to mitigate the impact of inheritance tax. However, for estates worth more than £2 million the ANRB will be reduced.
Also, if the deceased has an interest in more than one residential property, then the personal representatives can nominate which property the ANRB is to be applied to provided that the property has been occupied by the deceased at some time. .
It is important that the effect of this new measure is considered carefully against individual financial circumstances and the contents of your existing will. Taking independent legal and tax planning advice and reviewing your will is advisable.
The contents of this article are for the purposes of general awareness only. They do not purport to constitute legal or professional advice. The law may have changed since this article was published. Readers should not act on the basis of the information included and should take appropriate professional advice upon their own particular circumstances.