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Inheritance tax and the summer budget

The summer budget announced this week made significant changes to inheritance tax (IHT) regulations.

The current rate for IHT is 40 per cent of the deceased person’s estate. It is paid on taxable assets above the so-called ‘nil rate’ band – the amount below which IHT is not payable: currently £325,000.

Certain tax reliefs and exemptions can be applied to minimise any IHT liability you may have. For example, an exemption applies when gifts on death are made between spouses or civil partners and other valuable exemptions can be used if the paying party has an interest in certain types of business.

The IHT nil rate band is  a ‘transferable allowance’ between spouses and registered civil partners. This means that in a traditional family dynamic, where the first spouse to die leaves their estate to the surviving spouse, the survivor could have two full nil rate bands to offset against the value of their own estate when they pass away. Such double allowances would mean that up to £650,000 (for the tax year 2014 to 15) is exempt from tax on the second death, and in certain circumstances this exemption rate can be increased still further to capture the nil rate band from a previous marriage where the individual was widowed.

From 2017, there is also to be a new additional nil rate band  per person of £100,000  on the net value of a family home or main residence. The tax threshold for the main residence will be increased to £125,000 in 2018/19, to £150,000 in 2019/20 and to £175,000 in 2020/21, meaning in 2020 a home worth £1 million will fall outside of IHT. The additional threshold will then increase in line with inflation for subsequent years but the £325,000 nil-rate-band will remain frozen.

This could save £70,000 that would otherwise be due on qualifying property.  If an individual downsizes to a home that is significantly cheaper then there will be a mechanism so that the allowance is not lost because HMRC will still award the allowance up to the value of their previous home.

The indications are that there will also be an additional ‘transferable allowance’ between spouses and registered civil partners, and if so that could mean that the double allowance already granted to spouses and civil partners of £650,000 could rise in certain cases by £350,000, taking it to £1 million.

The new nil rate band will apply only to the value of a family home or other main residence if  it is transferred to a direct descendant of the deceased – i.e. their children or grandchildren.

It should be noted that a cap has also been proposed so that estates worth over £2 million will suffer a tapered reduction in the relief available.

Proposals which seek to preserve the family home for future generations will warm the cockles of the hearts of many proud family home owners. You can certainly see the attraction of the proposal as an election tool. For many people the thought of having to pay tax on the family home when it eventually passes on to their children is a stab in that same heart.

However, the question that has to be asked if what effect all these changes will have on the ground? In my view they will simply add a further layer of complexity rather than simplify IHT.

It could be argued, moreover, that these changes are primarily aimed at families who own property in the wealthy south, where average property prices have soared. In addition, the changes only appear to provide a tax break on qualifying property to those of us who are married or in a registered civil partnership, when passing property on to descendants (including children/ step children and adopted children), but not to anyone else.

As if all that wasn’t enough, the budget also announced a review of deeds of variation. These  have been used over generations to vary the terms of a will after an individual has died. Any eventual change to these will need to be very carefully considered.

Jane is a solicitor in Stowe Family Law’s Hale office in Cheshire. She has over 15 years of experience in wills, tax trusts and probate law and is a fully qualified member of the Society of Trusts and Estate practitioners (STEP).

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