Inheritance Tax Changes - what you need to know
Leaving something behind for your loved ones when you pass away is something that many are very keen to pursue but find challenging to approach on their own. Our solicitors have extensive experience in helping people plan for after their death, from writing clear wills to assigning Powers of Attorney for later life. One increasingly important aspect for people to consider when making provisions for the future is Inheritance Tax, particularly after recent changes to its structure.
Inheritance Tax is a tax on the estate (i.e. money, property, possessions) of someone who has died to be paid to HM Revenue and Customs (HMRC). This is carried out by the executor of the will and stands at 40% of the excess value over the Nil Rate Band (NRB), which up to April 2017 was a static £325,000. But, recent changes to this system has significantly altered the impact of Inheritance Tax in certain circumstances.
April 2017 Changes Outlined
As of 6 April 2017, individuals can claim an additional £100,000 Residential Nil Rate Band (RNRB), which can be applied to their property following their death. At first glance, you might consider this a significant rise to the existing £325,000 NRB before Inheritance Tax is paid on an Estate at 40% over that value. However, not everyone is eligible for this additional band.
To claim the new allowance, the person must have died after the RNRB was introduced, have owned a property valued at less than £2 million and arrange for it to be left to lineal descendants, which may only include children, grandchildren, stepchildren, adopted children and foster children.
Furthermore, in the same way married couples can claim their spouse’s NRB, they would also be able to claim the RNRB, meaning their joint threshold before Inheritance Tax can be worth up to £850,000. By April 2020, this RNRB will increase from £100,000 to £175,000, meaning married couples could have a joint threshold of £1 million if they are eligible.
What does this mean for you?
These new regulations contain a lot of detail and are far from straightforward, but what it boils down to is that parents increase the threshold before Inheritance Tax is applied when passing property down to their descendants, which may help them minimise costs.
Nevertheless, there are difficulties that must be navigated. Firstly, if you have left property to grandchildren under the age of 18 for them to inherit property from your Estate upon reaching the age of 21, this can prove a challenge. This is because RNRB needs to be applied within two years from date of death or within two years from the date the beneficiary turns 18. With the introduction of the Inheritance and Trustee’s Powers Act, this can be overcome.
Next, if your will leaves property on a Life Interest Trust or a Discretionary Trust, the only eligible persons to receive property are lineal descendants. For example, if a property was sold in order to fund care home fees, the net proceeds of sale will count as the residence. But this cannot be applied if a person has downsized; for instance, when a family home is sold for £500,000 and a small flat purchased for £150,000, only £150,000 of the available RNRB could be applied.
And remember, if property is valued over £2 million, the RNRB will be tapered away.
Get professional advice on your Inheritance Tax
The rules surrounding the RNRB are complex and families should consider revisiting their existing wills so as to ensure the RNRB can be applied, which might require specific provisions.
The good news is that individuals and married couples can now avoid Inheritance Tax at 40% for assets up to £425,000 and £850,000 respectively, but to ensure this will apply to you, you should consult a professional. Our supportive solicitors have a wealth of experience managing the estates of clients and arranging your assets to protect it for future generations.
Get in touch to arrange a consultation by phone on 01702 477106 or via email at firstname.lastname@example.org.