By 2020-21 couples could be free of IHT on up to £1m of their wealth which can be passed on to their children or grandchildren.
Currently, spouses and civil partners can pass all of their wealth to each other without tax. However, tax may be payable when it comes to cascading wealth down the generations. We can all pass on £325,000 which is the current Nil-Rate Band (NRB) before tax is due. Nil-rate bands can also be passed between spouses.
The new regime makes it much more complicated, so much so that the Government website has 18 examples of how the new Residence Nil-Rate Band (RNRB) can be used and calculated.
The RNRB can only be used in respect of one residential property, which does not have to be the main family home, but must at some point have been lived in by the deceased. A property that has always been a buy-to-let, for example, will not qualify.
This new allowance is available only when estates are directly inherited by children, stepchildren, adopted children or grandchildren. The fact that a home is sold as part of the administration of the estate doesn’t affect the availability of RNRB.
It is also possible to claim the RNRB if you sell your family home to move to a smaller property, or into rented accommodation or a nursing home before your assets are inherited by your children, stepchildren, adopted children or grandchildren.
You will not be able to claim the RNRB if your property is left to your brothers, sisters, nieces or nephews. You may wish to consider leaving other assets to your siblings, nieces, nephews and or friends so that you can maximise your allowances.
For couples with estates above £2m the RNRB is tapered away by £1 for each £2 that the estate exceeds the taper threshold.
The RNRB is being phased in from 6 April 2017; the table below shows the allowance and when it becomes available.
£100,000 in 2017 to 2018
£125,000 in 2018 to 2019
£150,000 in 2019 to 2020
£175,000 in 2020 to 2021
From 2021 to 2022 the allowance will increase in line with the Consumer Prices Index (CPI).
For most of our clients we would recommend that you speak with your solicitor and tax advisors in tandem with each other. It is worth noting that many of the traditional estate planning arrangements which have been set up will no longer work as efficiently with these changes and should be revisited urgently.
We will be able to assist with some financial planning solutions that help mitigate IHT. If you would like us to refer you to a solicitor or an accountant to assist you with this important planning exercise then please get in touch by contacting your usual consultant.