Important Inheritance Tax Changes & You

IHT (Inheritance Tax) on gold coins on white background

Last year we wrote an article on Inheritance Tax (IHT) and how you could mitigate this by using joint life cover payable on second death.

This was only a year ago, and already there have been major rule changes announced that can have a major effect on how much your family may have to pay the taxman!

Last year HMRC raised over £4 billion from IHT alone!

This major change is about your home acquiring it’s own nil rate band, on top of your existing allowances.

It’s called a ‘main residence band’.

As most of our clients have property that has a high value as a proportion of their overall estate, this is very important. Please note that the changes are from 2017 and have caveats.

So let’s look at this new situation.

Basic Summary of Allowances

  • The current allowance whereby no inheritance tax is charged is on the first £325,000 (per person) of someone’s estate, which is the value of their total assets they leave behind when they die. So for a couple it is £650k.
  • Above the threshold, the charge is 40% (or 36% if you leave at least 10% of your assets to a charity)

New Main Residence Rules

  • The new tax-free ‘main residence’ band will be introduced from 2017, but it is only valid on a main residence and where the recipient of a home is a direct descendant (classed as children, step-children and grandchildren) and not into a trust.  It is being phased in gradually; starting at £100,000 (again, per person for a married couple or those in a civil partnership) from April 2017, rising by £25,000 each year till it reaches £175,000 in 2020.
  • So, in 2017 the maximum that can be passed on tax-free is £850,000 for married couples or those in a civil partnership, £425,000 for others. For singles, this is made up of the existing £325,000, plus the extra £100,000. For couples, when the first one dies  their allowance is passed to the survivor, so that £425,000 is doubled to £850,000.
  • In 2020, the tax-free amount will rise to £1m for couples, £500,000 for singles, as the main residence allowance rises.
  • Currently, without the ‘main residence’ additional allowance, couples can leave a home worth £650,000 without it attracting inheritance tax – for singles it is £325,000.
  • On estates worth £2 million or more, homeowners will lose £1 of the ‘main residence’ allowance for every £2 of value above £2m. So for a couple, estates worth £2,350,000 or more will receive no additional allowance.
  • Those who downsize now and therefore may have cash once their home is sold (and where that money once formed part of the equity in a property), will still be able to pass on the same value of their estate tax-free to their dependents as had they kept a pricier property.
  • Anyone who downsizes their property and who dies after 2017 will still get the main residence threshold added to their allowance.

So as an example, using a recent client we worked with the following will apply (excluding inflation):

2016

  • Home value £1.1 million
  • Other assets £450,000
  • Total Estate £1.55 million
  • IHT bill £360k

2020

  • Home value £1.1 million
  • Other assets £450,000
  • Total Estate £1.55 million
  • IHT bill £220k

So a welcome saving of £140k.

However, not taking inflation into account means that the tax hit is likely to be more!

Key Considerations

It really pays to pre-empt a problem with IHT rather than try to react later.

Action Point

If your assets are considerable, and certainly if they are higher than £1m, make sure you have a robust strategy in place to ensure your estate goes to those who you want to benefit – not to the taxman.

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About Graeme Urwin

My passion is to help senior doctors and dentists organise their finances to create their own strategy to achieve their goals in life. I do this impartially as I charge fees. Outside of work the words that best describe me are: family man, squash, badminton, jogging, travel, reading, archaeology, genealogy, writing a book on Robert the Bruce. I live in the hills of Northumberland in Rothbury and believe in living the life you love.