Should you still plan for inheritance tax?
Some people may have gained the impression from the last Budget that inheritance tax (IHT) is no longer an issue for most families.
After all, hasn't the IHT threshold the nil rate band - been increased to 1 million? Unfortunately not. Since April 2009 there has been no IHT due on the first £325,000 of an estate. In the Summer Budget 2015 the Chancellor announced that this nil rate band would remain frozen at £325,000 until April 2021. This can be increased to as much as £650,000 by using the unused nil-rate band of a deceased spouse or civil partner.
What did change in the Finance (No 2) Act 2015 was the introduction of an additional main residence nil-rate band. This is available where someone has left a residential property to one or more direct descendants that had been their sole residence at some point. The main residence nil- rate band comes into effect for deaths on or after 6 April 2017. The effect is to raise the nil-rate band by £100,000 for the tax year 2017/18, increasing it by another £25,000 in subsequent tax years, reaching £175,000 for the tax year 2020/21 and later tax years.
The value of the main residence nil-rate band will be the value of the deceased's person interest in the residential property (after deducting any mortgage) or the maximum amount of the band at the time of death, whichever is lower.
For example, Mrs Smith dies in July 2018, leaving a home worth £700,000 to her children. Her husband has already died, leaving his whole estate to her and therefore the whole of his nil rate band is available to her estate. Mrs Smith's maximum nil-rate band is therefore increased from £650,000 (i.e. her nil rate band of £325,000 plus her late husband's unused nil-rate band) by £50,000 to £700,000. In this case the tax saved is just £20,000.
A property which was never a residence of the deceased, such as a buy-to-let property, will not qualify. The benefit will also be reduced where the net value of an estate is above £2 million.
Mitigating the effects of IHT should therefore continue to be an important part of financial planning. There are a number of planning opportunities that can be used. For example, the rate of IHT is reduced from 40% to 36% where 10% or more of a deceased's net estate is left to charity. We will be happy to discuss these with you.
The value of tax reliefs depends on your individual circumstances. Tax laws can change. The Financial Conduct Authority does not regulate tax advice.