The Office for Budget Responsibility (“OBR”), an independent fiscal watchdog for the government, has estimated that the number of UK families paying Inheritance Tax (“IHT”) is at its highest level in over 35 years, meaning many are leaving their loved ones less than they had thought. The OBR estimate that 40,100 families will face tax on their inheritance in the current tax year, rising to 45,100 in 2016-17.
Despite the Prime Minister saying before the last election that IHT should only apply to the “very wealthy”, almost three times as many estates are expected to incur an IHT liability than compared to six years ago.
A large reason for this increase is that the Nil-rate Band (NRB) allowance – the amount you are allowed to pass on to your beneficiaries tax free – has remained frozen at £325,000 since 2009. Any part of your estate above this amount will be subject to 40% Inheritance Tax. This can make even the most altruistic client’s eyes water.
With property prices rising by £20,000 in 2015 to a nationwide average of £290,827, it is not difficult to see why many people suddenly find their estates tipping over the £325,000 mark.
Good news is on its way however - last summer the Chancellor announced a new relief aimed at saving thousands of estates from being pushed into IHT territory.
This additional IHT band, to come into force in April 2017, provides that where a residence is passed to children or grandchildren following your death, the estate will benefit from an additional £100,000 tax free allowance. This £100,000 band will first come into force in 2017/18, rising to £175,000 in 2020/21. This additional NRB can only be applied to one property which has, at some point, been a residence of yours. Like the existing NRB, this ‘top-up’ will be transferable between spouses on the first death, allowing parents to jointly pass up to £1m tax free to their heirs.
In the meantime however, there are steps you can take to limit unnecessary exposure to IHT, albeit with caveats. The path of effective succession planning rarely does run smooth however and circumstances vary vastly from one person to the next, so it is best to seek expert advice around your individual tax liability, in order to explore the most effective options for you and your family.
Doran Mitchell is a solicitor in our Edinburgh Private Client team. Contact him on 0131 624 6821 or via email for more advice on Inheritance Tax or other tax issues, or for other legal enquiries including Wills, Powers of Attorney or Trusts.