The first major changes to Inheritance Tax policy for many years will take effect on 6 April 2017. Trainee Solicitor Chris O’Callaghan examines exactly how to take advantage of these changes and potentially reduce your estate’s tax liability.
When you pass away everything you owned forms your estate. Every estate enjoys a nil rate band or in other words a tax free allowance. The current nil rate band is £325,000. This will remain the case until 2021. The changes introduce a further nil rate band, known as the “main residence nil rate band”, which can be used only against the value of the main residence of the deceased if it is passed to your direct descendants. The value of this new “main residence nil rate band” will increase each year as shown below:
Thereafter the “main residence nil rate band” will increase in line with inflation as calculated in the Consumer Price Index.
If you add the nil rate band of £325,000 and the new main residence nil rate band at the 2020 rate of £175,000 this would give a maximum of £500,000 tax free for a single estate. It is possible for a married or civil partnership couple to achieve a total tax free allowance of £1 million (which the government has highly publicised) if certain conditions are met.
The main residence nil rate band only applies if the property is passing to your ‘direct descendants’. This means your children or grandchildren but also includes step children, adopted and foster children. If you plan to pass your main property to other family members the main residence nil rate band will not be available.
The example we will work through hereafter deals with a married couple, Charlie and Jamie.
Charlie and Jamie jointly own a property in London.. They have prepared Wills leaving all their property to each other and when both have passed away to their children Sarah and Meg.
By preparing Wills leaving their entire estates to each other they are taking full advantage of the ‘spousal exemption’. The ‘spousal exemption’ provides that all property passing between married couples or civil partners upon death is tax free. When Charlie dies and his entire estate will pass to Jamie tax free as the spousal exemption applies. This leaves the entire £325,000 nil rate band of Charlie’s estate unused.
The unused nil rate band from Charlie’s estate can be transferred to the estate of Jamie upon her death. Nil rate bands can only be transferred between married couples and those in a civil partnership. This transfer then gives a total allowable nil rate band of £650,000 (currently) for Jamie’s estate. It is worth noting that Charlie’s nil rate band will be worth the same as Jamie’s irrespective of the date of death of Charlie. So if the nil rate band has been increased to £400,000 when Jamie passes away Charlie’s nil rate would be worth the same.
Jamie’s estate therefore has a double nil rate band worth £650,000. The Wills they have prepared state that upon the death of the survivor everything is to pass equally to Sarah and Meg. Jamie’s estate can now use the new “main residence nil rate band” as the main residence is passing to direct descendants.
The Government have indicated that if the survivor passes away after 6 April 2017 both members of the couple can benefit from the additional allowances. Assuming that Jamie passes away in 2021, her estate can use the following reliefs.
The total of all of the above reliefs come to £1,000,000.
Taking advantage of the spousal exemption cannot be left to chance. If the deceased has no Will then the Intestacy Rules would come into play. In the case of married couples or those in civil partnerships the first £250,000 of the estate passes to the spouse and thereafter half of the remainder of the estate. The other half of the remainder will pass to children or grandchildren (or remoter relations if none) and this will be taxable, and will use up some or all of that estate’s nil rate band depending on the estates worth.
Married couples or civil partners to take advantage of the new rules should have Wills leaving all their property to each other and thereafter the property must be left to your direct descendants. It is important to stay apprised of the changes to the Inheritance Tax rules in order to ensure that you fully benefit from the tax reliefs available. The rules do change from time to time and you and your family may need to change your Wills if these new changes affect you.
Ronald Fletcher Baker LLP can assist you with drafting Wills and all forms of estate planning.