Inheritance Tax (IHT) is understandably considered by many to be the most hated tax in the UK. No-one in mourning wants to grapple with the tax man, regardless of wealth or status. Last week we heard criticism from within the conservative party, of the complexity surrounding the Chancellor’s proposed changes to the IHT rules announced in the July Budget. Andrew Tyrie, chair of the Treasury Select Committee, wrote to the Chancellor claiming that the rule changes are ‘a mess of complexity and uncertainty and they certainly don’t need to be to in order to achieve the government objectives.”
Once the full complexity of the changes are unravelled, it is clear to see that it is those individuals with assets of over £1,000,000, typically invested in the family home, who will lose out, if they do not seek the right advice.
The current per person threshold at which IHT becomes payable is £325,000. George Osborne has proposed that by 2020 homeowners will have an IHT threshold of up to £1,000,000. The rules apply to couples, which mean their joint threshold is £1,000,000. This means that married couples and civil partners will be able to pass on assets worth up to £1,000,000, to direct descendants, including a family home, without paying any IHT at all.
These rules, known as ‘nil-rate residence tax’ are set to be introduced for deaths on or after 6 April 2016. They will be phased in over a period of four years and, are only available where the residence of the deceased is inherited by direct dependants.
- 2017-2018 the maximum additional amount will be set at £100,000 per person, per couple
- 2018-2019 the maximum additional amount will be set at £125,000 per person, per couple
- 2019-2020 the maximum additional amount will be set at £175,000 per person, per couple
There will be a tapered withdrawal of the additional nil-rate band for estates with a net value of more than £2,000,000. This will be set at a withdrawal rate of £1 for every £2 over this threshold.
This means that by 2020 the additional rate for a couple will be £350,000 (£175,000 X 2). If an estate is worth £2,700,000 then the entire additional relief will be clawed back and the couple will be left with the original nil-rate band of £650,000 (£325,000 each).
Andrew Tyrie has suggested that a better way to address IHT would be to remove the property specific element of IHT relief and increase the overall tax free allowance for estates to £500,000, which would achieve the same policy objectives. Of course, changing this policy would not sit well with the Labour party who were quick to criticise such a move.
There is so much to consider in the ever changing IHT landscape and it is clear that individuals need to be prepared for all tax related eventualities when planning to pass on their estates to family.