If you’re not a regular follower of updates to tax legislation, you might be forgiven for a sharp intake of breath last week at claims in the press that changes to tax legislation could result in a jaw-dropping 80% Inheritance Tax bill!
While the rules and conditions of calculating Inheritance Tax (IHT) can be complex, these figures are misleading and may cause unnecessary fear about the level of tax you may be exposed to.
Many people baulk at the level of tax they think their estates may be subject to following their death, but with careful planning and management the final bill is most often not as bad as it would first appear.
What is the current IHT situation?
At the moment when you die, your estate is assessed for IHT. Each individual is given a “Nil Rate Band” (NRB) allowance, which is currently £325,000. Under the current rules, any estate beyond this allowance is potentially taxable at 40%. The NRB is transferable between spouses and civil partners, which means that couples can benefit from a combined NRB of £650,000 at the current rates.
What changes are due in April?
Once the proposed changes come in, if you are leaving your family home to your direct descendants, you will be given an additional Main Residence Nil Rate Band (MRNRB) over and above the non-taxable £325,000.
The MRNRB will be set at £100,000 in 2017, gradually increasing to £175,000 by the tax year 2020/21. Again, this provision will be transferable between spouses or civil partners. This means that by 2020/21, spouses or civil partners may be able to combine their NRB and MRNRB to enjoy a combined non-taxable estate of £1,000,000.
The MRNRB will be gradually withdrawn, or tapered away, for high-value estates valued at more than £2 million, even if a home is left to direct descendants. The MRNRB will be reduced by £1 for every £2 that the value of the estate is more than £2million. This applies only to the MRNRB however, the NRB of £325,000 will remain intact no matter what the total value of the estate.
So what does that mean?
These changes have actually been brought in to address concerns that rising house prices are pushing more and more families over the current £325,000 NRB limit.
The new provisions will, in certain circumstances, reduce the tax paid by families who intend to pass the family home down to their descendants, rather than increase the rate of tax.
However, in order to ensure that your relatives receive everything they are due from your estate after you die, we would always recommend you speak to a reputable solicitor about tax planning as early on as possible. This is especially important now, as those tax planning measures which worked well prior to these changes being announced may no longer be the best solutions for your situation.
You can read the full details of the changes on HMRC’s website.