The purpose of this article is to provide an outline of how the recently announced changes to Inheritance Tax rates will apply and whether you need to consider amending your Will or undertake any relevant lifetime planning to make the most of the changes.
The Current Position
With Inheritance Tax there are two main current exemptions. The first being the nil rate band (NRB) and the second the spouse exemption.
Every person has an Inheritance Tax exemption of £325,000 (NRB) which means that you can leave assets up to this value without your estate being liable to Inheritance Tax. Any amount over the current NRB is taxed at 40%.
With regard to the second exemption, if the whole of the estate is left to a surviving spouse or civil partner, then there will not be a Inheritance Tax liability, no matter how much the estate is worth, as spouse exemption will apply.
There is a further exemption known as the Transferable Nil Rate Band (TRNB). Where a person leaves their estate to their spouse on the first death (meaning that there is no Inheritance Tax liability due to spouse exemption) then on the second death, the unused NRB of the first spouse to die can be added to the value of the estate of the second spouse, resulting in a total Inheritance Tax exemption of £650,000.
The Summer Budget of 2015 announced that there is to be an additional exemption, to help certain estates which are currently liable to Inheritance Tax, because of the continued increase in property values, to minimise the Inheritance Tax liability.
The Main Residence Nil Rate Band
The Government is to introduce a Main Residence Nil Rate Band (MRNRB). This allows parents and grandparents, who wish to pass on their family home (main residence) to their direct descendants, to do so without incurring any Inheritance Tax liability where the estate, including the main residence, that is worth up to £1million (or £500,000 for a single person). The MRNRB will be phased in gradually between 2017 and 2020.
Each person will get a MRNRB of £100,000 from April 2017. This will be increased to £125,000 in 2018, £150,000 in 2019 and £175,000 in 2020.
As above, if the first spouse to die leaves the main residence to his/her surviving spouse, it benefits from spouse exemption but in future the unused MRNRB can also be transferred. The result is that married couples or civil partners will be able to leave estates worth up to £1million to their direct descendants without there being any Inheritance Tax liability.
Tax year | MRNRB | Nil Rate Band | Combined Nil Rate Band for both spouses or civil partners |
Before 2017-18 | £100,000 (can be carried forward for surviving spouse or civil partner's use). | £325,000 | £850,000 |
2017-18 | £100,000 | £325,000 | £850,000 |
2018-19 | £125,000 | £325,000 | £900,000 |
2019-20 | £150,000 | £325,000 | £950,000 |
2020-21 | £175,000 | £325,000 | £1,000,000 |
The MRNRB will only relate to the value of the main residence and be available if the main residence is left to direct descendants.
Direct descendants are classed as children, step-children and grandchildren. Individuals without children will not benefit from the MRNRB even if they wish to leave their property to their nieces or nephews. The MRNRB only applies to a main residence and not buy-to-let properties.
There is provision in the proposed legislation for downsizing. The MRNRB will still be available where you sell your home and downsize. Similarly if you sell your home without purchasing another main residence, provided the sale took place on or after 8 July 2015 and at least part of your estate is inherited by a qualifying beneficiary, then the MRNRB will also be available.
It may still be possible to claim the RNRB if you have given away your home to your children, but still retain a benefit from it, for example, you continue to occupy it solely or with your children. However, it is advisable to take legal advice on this and review your Will.
If you own more than one property at the time of your death that is (or has previously been) your residence, your executors must choose which one will benefit from the RNRB.
The MRNRB will not apply to estates worth over £2million as there is a tapering provision. This states that for every £2.00 over £2million that the estate is worth, the MRNRB will be reduced by £1.00. For wealthy estates, it is advisable to seek advice on how to legitimately reduce the value of an estate so it can utilise the MRNRB. This can involve lifetime trusts but both legal and financial advice will be required.
For further advice please contact our private client team who will be happy to help.
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