Inheritance Tax (IHT) has been in existence in some shape or form since 1694. It was thought that in recent years that more and more people have been subject to IHT, however it is just returning to the levels paid back in the 1979-80 tax year. Back then you were taxed at up to 75% on inherited assets above £25,000, compared to 40% above £325,000 the Nil Rate Band (NRB). In 1980 the average house price was £24,000 compared to February 2017 when it was £217,502 (UK House Price Index). In percentage terms it has meant that less people are subject to inheritance tax especially when you add the fact that married couples and civil partners can have a NRB joint allowance of £650,000 before assets are subject to 40% tax. The NRB has been at its current level since 2009 and is set to remain at this level until 2021.
Even though inheritance tax is a tax on death it is has continued to become more and more unpopular. As a result the government have made changes so that less and less people will become subject to it in the future. Since the reason why most people are subject to inheritance tax is because of the value of their home the changes only apply to their main residence. The government’s new residence nil rate band (RNRB) extends the point at which an individual begins to pay inheritance tax on their home. The RNRB is only available where the main residence passes to children – including step, foster or adopted or linear descendants on death. One important point to note is that the RNRB could be lost if the property is directed into a discretionary trust so wills should be reviewed to make sure that they are set up appropriately. The RNRB came into force at the start of this tax year at the rate of £100,000 and will rise by £25,000 each tax year to tax year 2020-21 when it will be £175,000 per person.
To show what affect this will have on estates we will compare the effect of the RNRB on a married couple dying with the first spouse dying in 2010 and the surviving spouse dying later. As the RNRB and NRB can be transferred between husband and wife on the death of the first spouse they will have both of their allowances on death. If the survivor was to die in the tax year 2016-17 with their estate consisting of nothing apart from their main residence worth £1 million there would be a tax charge of £140,000. If the survivor died in the tax year 2020/21 with the value of their home now at £1.1 million there would be £40,000 in inheritance to pay as shown in the table below.
|Tax year 2016/17||Tax year 2020/21|
|Total estate at death||£1,000,000||£1,100,000|
|Total NRB||£650,000 (£325,000 + £325,000)||£650,000 (£325,000 + £325,000)|
|Total RNRB||N/A||£350,000 (£175,000 + £175,000)|
|Estate subject to tax||£350,000 @ 40%||£100,000|
|Total tax to pay||£140,000||£40,000|
So that what are deemed to be larger estates do not benefit from the RNRB this allowance will be reduced by £1 for every £2 that an estate exceeds £2million. This means that in the 2017/18 tax year an estate valued at more than £2.2million will lose all of the additional benefit introduced. By the 2020/21 tax year the estate will need to reach £2.35 million before it loses all of the extra allowance. Other key things to note are that you can only elect one residential property to qualify for the relief and it will be down to the personal representatives of the estate to elect the appropriate one. There is also provision in the rules for downsizing to a property with a lower value.
There are many different ways that you can reduce the amount of your estate that could be subject to inheritance tax that we would be happy to discuss. For any financial advice Bradbury Hamilton, are able to advise. Visit www.bradburyhamilton.co.uk or call Sheriar Bradbury on 020 7220 7274 for more information.