Know your limits
The current amount that an individual can pass free of Inheritance Tax stands at £325,000 (often referred to as the Nil Rate Band (NRB). If your estate – the sum of your savings, investments, the market value of the house you live in and other assets – is worth more than this, the remainder will be taxed at 40% when you die.
Anything which passes between spouses/civil partners on death is not subject to Inheritance Tax (IHT). Spouses and civil partners can also inherit any unused NRB, so the survivor of a married couple/civil partnership could pass up to £650,000 to the next generation free of IHT. Jim Noble looks at IHT and what you can do to reduce IHT on your estate.
Inheritance Tax – a growing problem?
You don’t have to own a very large estate to leave behind a significant Inheritance Tax bill. The nil-rate band has been frozen at £325,000 since April 2009, but the average price of a UK property has risen 33% over the same period*.
And with more people’s wealth invested in their property, more families are being drawn into the IHT net.
HMRC figures revealed that in the 12 months to May 2017, IHT receipts totalled £5.1bn meaning that the £5bn threshold for 12 months was broken for the first time, increasing by 9% from the previous year – so IHT is becoming a more widespread tax, rather than being just for the wealthy.
Acknowledging the problem, the Government introduced an additional IHT allowance – the ‘residence nil-rate band’.
Understanding the Residence Nil Rate Band
The Residence Nil-Rate Band (RNRB) will apply for deaths on or after 6th April 2017. This new additional allowance will exempt the first £100,000 of a home’s value from Inheritance Tax as long as it passes to a direct descendant which includes biological, adopted and fostered children.
The residence does have to be a property of dwelling during the individual’s lifetime. This means that a buy-to let property does not qualify, and the individual does have to have lived in the property at some point before it qualifies as a former residence.
Rates of Main Residence Nil Rate Band?
This exemption will increase every year for the next four years.
Tax year | Residence Nil Rate Band Allowance |
2017-18 | £100,000 |
2018-19 | £125,000 |
2019-20 | £150,000 |
2020-21 | £175,000 |
The available allowance will be reduced if the value of property is less than the RNRB. Furthermore, any unused RNRB can be transferred to a surviving spouse or partner.
Be aware of the limitations of RNRB
Any property gifted before death is unable to qualify. Furthermore, assets passing into certain trusts might mean that families could lose the benefit of the RNRB.
For estates which have a net value of over £2 million, the MRNRB allowance will be reduced by £1 for every £2 that the net value exceeds that amount. So for example, if your estate is valued at over £2.2 million then you will not have any RNRB allowance.
Taking actions to manage IHT liability
Making gifts during your lifetime can reduce the value of your estate. Alison Clifford provided an overview of making gifts in last month’s Financial Update (link).
You can consider putting assets into trust – which means that they are no longer included in your estate but equally it means that you no longer control or own the assets. But assets settled into certain trusts that are set up during a person’s lifetime will take seven years to become fully IHT exempt, as will gifts.
Review your Wills to check that your wishes are not affected by this new allowance and ensuring estates are shared in the most tax-efficient way possible.
If your estate is approaching the £2 million threshold, you could review asset and property ownership so that each spouse or civil partner keeps their respective assets below £2 million and retains the RNRB.
There are some investment options, such as Business Property Relief investments which have attractive exemptions for IHT, but BPR-qualifying investments place your money at risk and you may not get back the full amount you invest. What’s more, investments in unquoted companies or those quoted on Alternative Investment Market (AIM) are likely to have higher volatility and may be harder to sell than shares listed on the main market of the London Stock Exchange.
If you are likely to face an IHT bill on your estate, life cover can also be taken out so that the liability is met by the life policy – removing the additional worry from your beneficiaries of having to meet the IHT bill.
There are many ways to manage IHT. Ask your Consultant to review your own circumstances so that they can discuss the best recommendations for you.
* Source: Nationwide report: ‘UK house prices since 1952’
This article is for information only and is not to be taken as Financial Advice CA1513 08/18
