HM Revenue and Customs data reveals that Inheritance tax bills are rising and tax paid in 2013 was 15% higher than in the previous year. The position is particularly critical in London and the South-East with Inheritance tax payers in this region paying half of the UK’s total IHT bill.
This situation has arisen because the Inheritance tax nil rate band (the amount that can be left to any beneficiary free of tax) has been frozen now for six years and will continue to be frozen until 2020/21. At the same time, despite the financial crisis, assets values have continued to rise, with the property prices in London and the South-east being particularly resilient.
When it comes into force in 2017/18, the new residence nil rate band will help this situation. Married couples with joint estates of up to £1 million will enjoy a complete exemption from Inheritance tax through the combination of the existing transferable nil rate band and the residence nil rate band, when the latter is fully in force in 2020/21.
It should be remembered, however, that the new allowance will not bring any additional tax relief if you have never owned a property, or if you leave your property to someone other than your children, grandchildren or their spouses, or registered civil partners. In addition, there will be no benefit for larger estates as the new allowance is lost completely once an estate exceeds £2.7 million for a married couple.
So what action should those with larger estates consider taking? Careful Will planning can help maximise the benefit of the transferable residence nil rate band and the Inheritance tax bill for future generations can be managed through the use of Will trusts.
Lifetime gifts should be considered by those who are able to give away assets before their death. Planning should begin as early as possible as the gifts made will only be Inheritance tax free if the donor survives them by seven years. Capital gains tax should also be considered on any gift of assets other than cash as the gift will be a disposal for Capital gains tax purposes, potentially giving rise to a liability. The use of trusts can be considered if Capital gains tax is a problem as this can enable any liability to be deferred.
One lifetime exemption that is often overlooked is the normal expenditure out of income exemption. Excess income can be given away free of any Inheritance tax liability provided it does not affect the donor’s standard of living and the gifts are made on a regular basis. Those gifts can be to a trust rather than to an individual outright if you have not yet decided to whom you would like to make the ultimate gift. For individuals with large incomes and smaller outgoings the use of this exemption can be invaluable in enabling potentially substantial amounts of cash to be moved out of an estate, tax-free.
Contact an inheritance tax specialist
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You might also be interested in the following:
- The nil rate band main residence Inheritance tax allowance: some queries answered
- Factsheet: The family home
- Factsheet: Gifting the family home – the risks and benefits
- Wealth, Health and Inheritance Briefing – view the latest edition and sign up for regular updates
- Family Wealth blog – for news and articules