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How Does the Summer Budget Affect Me? – IHT
Inheritance Tax on leaving your house to your children: Changes to the rules and how they affect you
You will have heard that as a result of the summer Budget 2015, changes are being introduced in respect of Inheritance Tax (IHT) rules and allowances.
Inheritance Tax and the Nil Rate Band
At present, when a person dies, they have an allowance before IHT is charged. This is known as the “Nil Rate Band” (NRB) and is currently set at £325,000. Any assets in excess of this figure are taxed at a rate of 40%. The available allowance is reduced by any gifts made by the deceased within seven years prior to their death. These are called potentially exempt transfers (PETs) or Lifetime Chargeable Transfers (LCTs). The Government has now frozen the NRB until 2021.
“Transferable” Nil Rate Band
Any assets passing on death to a persons husband, wife or Civil Partner are exempt from IHT. For surviving spouses, any unused NRB allowance of the first of them to die can be transferred to the estate of the second, thus providing an allowance of up to £650,000 for married couples.
This is called the “Transferable” NRB, because it can be transferred between spouses.
There are some lifetime allowances and exemptions that can be utilised in order to mitigate a person’s IHT liability, so if you feel you are likely to have a taxable estate, it is a good idea to seek the advice of a solicitor.
Changes in the 2015 Budget
The recent changes aim to address increasing property prices, particularly in London and the South East of England, by providing an “additional NRB” (ANRB) in respect of a person’s main residence.
Where a person’s main home is being left to their direct descendants, (children, step-children, adopted and fostered children and their lineal descendants), an additional tax-free allowance is available in respect of that property. This is being phased in gradually from April 2017 as follows:-
2017-2018 = £100,000
2018-2019 = £125,000
2019-2020 = £150,000
2020-2021 = £175,000
After April 2021, the allowance will then continue to increase in line with the Consumer Price Index (CPI). Beyond 2021 the initial NRB allowance of £325,000 may hopefully be reviewed, at least in line with the CPI.
ANRB helps reduce the tax on houses…
Where a person’s home is worth in excess of £325,000, their estate can claim the additional allowance in respect of the property value.
For example – Alan dies in June 2017 leaving a property worth £400,000 to his children. As the value of the property is within the value of the NRB and ANRB allowances (which are added together when calculating IHT), no IHT liability will be chargeable in respect of the property. Alan’s executors can use his NRB (£325,000) and £75,000 of his £100,000 ANRB to reduce the IHT on his house.
…but can’t be used to reduce the tax on other assets
If Alan has other assets (for example bank accounts worth £100,000), the balance of the ANRB that hasn’t been used to reduce the IHT on his house (£100,000 – £75,000 = £25,000) cannot be set off against the liquid assets. IHT would be payable at a rate of 40% on the £100,000 worth of remaining assets.
The ANRB is not available on property which is not your “main residence”, so cannot be utilised against investment properties or holiday homes.
The additional allowance will operate in the same way as the transferrable NRB; allowing the extra amount to be claimed on the death of the second person (“the surviving spouse”) , but only if the second person dies after April 2017.
Other important provisions and exceptions
1) It doesn’t matter if the first spouse dies before 2017 or even before the current budget. The second death is the important one for this extra relief to apply.
2) Where the family home is valued under £325,000 (or £650,000 for married couples), then the additional allowance has no effect.
3) If you do not have any children or descendants, there is also no additional benefit to your estate from the ANRB.
4) A “downsizing credit” is being introduced for sales of properties after 8th July 2015 to encourage people to move out of large family homes when they are no longer required. This will enable some allowance to be set off against net proceeds of sale, but it remains unclear how this will work and whether the monies can be usefully invested.
5) There will also be a tapered reduction for estates exceeding £2 million – whereby £1 will be taken off the allowance for every £2 of the estate exceeding £2 million.
Although the changes are seen as a step towards tax savings for individuals, they will not be without their complications and some of the finer requirements remain unclear. These will no doubt be clarified as 2017 approaches.
However the new rules are a reminder to ensure that a person’s affairs are in order, if the new allowances are to be utilised effectively.
Many people still die without having prepared a valid Will. The new IHT rules rely on technical applications and conditions, such as having an interest in property, and gifting money directly to your descendants. A professionally drafted Will can ensure that your estate maximises the potential relief, whilst ensuring that your family’s interests are protected.
These allowances will not simply automatically help you. You need a properly drafted Will.
It is also likely that the administration of estates post 2017 will have additional complications, with various applications for additional allowances and necessary evidence. Seeking advice on such matters can again ensure that all available reliefs are claimed.
At W Davies we have an excellent team of Private Client solicitors, who can help with all aspects of Will drafting, IHT planning and the administration of estates, as well as advising on Lasting Powers of Attorney, trusts and Court of Protection matters.
Visit our Wills, Trusts & Probate pages for more information.