It has been reported that there has been a significant increase in the amount of Inheritance Tax (“IHT”) being paid from a deceased’s estate. Over the period of ten years, twice as much IHT has been paid to HM Revenue and Customs, namely nearly up to £4.7 Billion.
A number of factors could be the cause of this but is not limited to;
- Increase in property values
- Not planning ahead – not seeking advice regarding financial estate planning
Each individual has what is known as a Nil Rate Band allowance (“NRB”) of up to £325,000.
For married couples and those in civil partnerships the NRB for both individuals can be combined on the second death thereby making the NRB total of up to £650,000 depending on the particular circumstances.
The NRB is essentially the tax-free threshold whereby if the deceased’s estate is under their NRB then no IHT will be payable.
However, if the deceased’s estate is above the NRB, then IHT will be payable depending on who the beneficiaries are. For example, if the beneficiaries were charities then IHT would not be payable but if the beneficiaries were children of the deceased then IHT would be payable.
When IHT is payable it is calculated generally at 40% above the NRB threshold but if, for example 10% or more of the estate was left to charities then the marginal rate for the whole estate would be calculated at 36% not 40%.
The NRB is set to remain at the current allowance rate until at least the end of 2020 – 2021.
From April 2017, legislation will come into force providing additional IHT relief for property owners, in the form of Family Home Allowance (“FHA”). This relief will also be transferable between married couples and those in civil partnerships even if one spouse/partner dies prior to April 2017.
Over a period of four years the allowance will be as the follows:
- £100,000 per individual in 2017 up until 2018
- £125,000 per individual in 2018 up until 2019
- £150,000 per individual in 2019 up until 2020
- £175,000 per individual in 2020 up until 2021
Estates that are worth more than £2 million may lose some or all of the FHA.
To qualify for the FHA relief, the property must be left to one or more direct descendants of the deceased, this includes children, stepchildren, adopted children and foster children. Property cannot be left to siblings, nieces, nephews or other relatives. The property must have been the main residential home at some point. Only one property may qualify for the relief.
FHA will be available on properties sold or downsized on or after 8th July 2015, as long as the property is sold for the equivalent value of the FHA and both spouses/partners have not passed away when the relief comes into force.
If a spouse or civil partner unfortunately dies before April 2017, the surviving spouse/partner would be able to use their own and their deceased’s FHA when they die irrespective of whether or not the spouse or partner owned a share in the property or already passed a share to children.
However, after April 2017 it is necessary for a married couple or civil partners to have an interest in the property to qualify for FHA. This means that property owned solely by one spouse or partner would not qualify for the relief, but if the property was transferred into joint names to both spouses or partners in any ration, it would qualify for the relief.
By seeking advice regarding financial estate planning, by 2021 £1 million could be saved in IHT just by way of using the transferable NRB and FHA.
For many people in the South East it would be advisable to seek advice whilst still being able and capable of doing so, before it is too late.
