When it comes to inheritance tax, some people are simply dying at the wrong time.
How much inheritance tax will I be charged?
Currently, Inheritance Tax (IHT) is payable on death at the rate of 40 per cent of the aggregate value of an individual’s chargeable estate over and above the available IHT ‘nil rate band’. This is the allowance each individual gets before IHT is paid on their estate.
The IHT nil rate band allowance for this year 2016/2017 is £325,000. So any property or money someone inherits worth less than that will pass free of any tax bill.
However, more estates have been forced to pay significant IHT bills following the death of a loved one. This has been caused partly by of the sharp rise in house prices in recent years.
This is one of the reasons why the government proposed new measures in last year’s Budget to help people who have an estate (including a main residence) worth more than £325,000.
The measure announced is to be called the Residence Nil Rate Band (RNRB), which is an additional allowance for IHT. Its purpose is to assist only those who have a qualifying residential interest (usually this will be a house) which passes to a lineal descendant (such as children and grandchildren) when the owner dies.
Starting in 2017, this allowance will be gradually raised over a number of years. The increase is scheduled to proceed as follows:
- £100,000 in 2017/18
- £125,000 in 2018/19
- £150,000 in 2019/20
- £175,000 in 2020/21
Can inheritance tax allowance be transferred between spouses?
The new allowance will also be transferable between spouses. This means one partner can inherit their husband/wife’s RNRB (if available). So after 2020, a surviving spouse could pass £350,000 (two RNRBs) and £650,000 (two nil rate bands) on to children provided all allowances are available and the Will is structured correctly. This takes us to the magic £1 million tax-free that the government wanted to headline.
However, this new measure will only apply to deaths that occur from April 2017 so you would need to survive until 2020 in order to get the full relief for your loved ones. Similarly, for deaths between the announcement last year and the start of the new measures in 2017, this tax break is not available for their families.
In fact, newly published research done on behalf of the Daily Telegraph suggests that as many as 28,000 families will have to pay up to £80,000 because their loved ones will die before the start of the new measures.
Alan Miller is the director of financial firm SVM Private, which caters to wealthy people. He told the newspaper the new allowance “penalises some people for dying before others”. As people cannot choose when they die, he said, “the rules should be applied retrospectively from when they were announced”. IHT is “just a ‘jealousy’ tax”, he claimed.
If you are concerned about how much IHT you may be faced with, I recommend seeking legal advice to find out if these new measures will affect you. After all, it is important that your Will is structured to maximise the reliefs available.
Photo by woodleywonderworks via Flickr under a Creative Commons licence.