2016 was certainly a year to remember. As we look ahead in to 2017, we wanted to give you an update on an interesting inheritance tax change that will positively affect many of our clients.
Currently we each have a £325,000 ‘nil rate band’ during our lifetime. This is the amount of our estate that will not be subject to tax after our days. Part or all of this nil rate band may be used during a person’s lifetime via outright gifts or gifts into trust known as ‘chargeable lifetime transfers’. Once the remaining nil rate band has been deducted from the estate value, anything left is taxed at 40%.
It is worth noting that the tax rate is reduced to 36% for a person who leaves 10% of their estates net value to charity.
Couples who are married or in a civil partnership can inherit any unused nil-rate band when the first of the couple dies, so the total current joint nil-rate band can be up to £650,000.
During the 2015 Summer Budget, George Osborne announced a new additional transferable main residence allowance of £175,000 per person (by 2020/21). This will benefit a direct descendant who inherits an estate which includes the main residence and has a total value that exceeds the nil rate band.
The new additional main residence allowance is due to be phased in from APRIL this year as follows:
As it will ‘top-up’ the main nil-rate band, it will effectively raise the IHT-free allowance to £500,000 per person by 2020/21. Therefore if a married couple owns a family home and they wish to leave this to their children (direct descendants), the total IHT exemption will be £1m.
Estates with a net value of more than £2 million will be subject to a reduced additional main residence allowance, losing £1 for every £2 over this threshold (per spouse or civil partner).
The legislation outlines that only one residential property from the estate can benefit from the allowance. There is also some provision for ‘down-sizing’ of the property, to allow a claim for the full £175,000 exemption which could be useful for those releasing equity from their properties in less valuable areas.
As with many of the Osborne announcements, we won’t be sure of the entire workings of this system until April arrives. However, it is undoubtedly welcome news to many of our clients who currently exceed the nil rate bands by a small amount because of their property values.
Darren and I shall be factoring in these new rules with our clients this year and (as always) looking at ways that we can assist families with this often unwelcome tax.
Please don’t hesitate to contact us on 01437 772228 if there is anything at all that you wish to discuss further.