While more people are paying Inheritance Tax – and in larger amounts – the regime is about to get more generous for many homeowners.
New data from the Institute for Fiscal Studies (IFS) shows that, of those born in the 1970s, 75% have received or expect to receive an inheritance, compared with 61% of those born in the 1950s, and less than 40% of those born in the 1930s.1
But as the number of those receiving an inheritance grows, so does the number of estates paying Inheritance Tax (IHT). The number of estates on which IHT has been paid has quadrupled since 2010.2 What’s more, Britain has some of the highest death duties of any country.3 Beneficiaries have to pay 40% tax on each extra pound that is inherited above the nil-rate band of £325,000 (£650,000 for married couples or civil partners).
By the late 1990s, there was already a steady growth in receipts from IHT – and the numbers of estates liable to pay it – strongly linked with the growth in house prices. Today, swathes of the country are affected by IHT as property inflation puts more estates within its grasp.
Yet the Conservative government has long promised to reform these so-called ‘death duties’. In October 2007 the then shadow chancellor George Osborne announced that, if a Conservative government came to power, it would raise the IHT threshold to £1 million. However, the new government’s first Budget in June 2010 did not contain any such proposal and, over the five-year parliamentary term, the tax was left largely unchanged.
Government documents drawn up before the Summer Budget 2015 suggested that increasing the nil-rate band even to £500,000 per individual would be too costly, especially at a time of austerity. So the mission was to come up with a different measure targeted to ease the IHT burden only for those with modest homes.
Consequently, the former chancellor announced that, from April 2017, a new dedicated tax-free allowance, then called the ‘main residence nil-rate band’, would be introduced to specifically help protect a residence from IHT.
The new allowance is totally separate from the existing nil-rate band, as it will only apply on transfers of a residence to direct descendants. It will initially be phased in at £100,000 from April, increasing in £25,000 increments annually to £175,000 in 2020/21. From then on, it will increase each year in line with the Consumer Prices Index.
Like the existing nil-rate band, any unused fraction of the new allowance may be transferred to a surviving spouse or civil partner. Given this option, a couple could potentially have a total IHT tax-free limit of £1 million from 2020/21.
However, the rules are not straightforward and not everyone will gain. While the new allowance is consistent with the government’s pledge to take most family homes out of IHT, it’s also consistent with the former chancellor’s fondness for finding complex solutions to simple problems.
For example, the new allowance only applies to a residence that is passed to children and grandchildren, not to other family members. So those who do not have children cannot benefit from an increased allowance. What is more, unmarried partners cannot pass nil-rate bands to each other, meaning they can only have one £325,000 nil-rate band, and one £175,000 residence nil-rate band by 2020/21. This gives those individuals a maximum total allowance of £500,000.
Furthermore, the allowance is progressively withdrawn once an estate tops £2 million (after deducting any liabilities, but before reliefs and exemptions such as Business Property Relief). The rate of withdrawal is £1 for every £2 over the £2 million limit. Thus an estate worth £2.2 million in 2017/18 will have no residence allowance at all.
The new chancellor, Philip Hammond, has hitherto made no mention of any proposed amendment to the residence nil- rate band, so the new allowance is set to be implemented in just under three months’ time.
There will be many people who will be unable to take full, or indeed any, advantage of the additional allowance. For these individuals, lifetime gifting, trusts, charitable giving and other allowances will remain vital components of estate planning.
However, regardless of whether you can use the new allowance or not, it’s vital that everybody completes a valid Will, establishes trusts where appropriate, and makes use of annual exemptions such as gifting – and that financial advice is sought at the earliest opportunity.
The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief depends on individual circumstances.
Will writing involves the referral to a service that is separate and distinct to those offered by St. James’s Place. Wills and trusts are not regulated by the Financial Conduct Authority.