Advice on new Inheritance Tax rule changes

Glenn Welby and Aodh McGrath from Welby Associates
Glenn Welby and Aodh McGrath from Welby Associates

If you want to have control over what happens to your assets after your death, effective estate planning is essential.

You want to make sure you protect as much of your wealth as possible and pass it on to the right people.

If you do not plan for what happens to your assets when you die, your estate could be subject to Inheritance Tax.

The rules around Inheritance Tax changed from 6 April 2017. The introduction of an additional nil-rate band is good news for married couples looking to pass the family home down to their children or grandchildren, but not every estate can claim it.

Bereaved families

It pays to think about Inheritance Tax while you can and calculate how much potentially could be taken out of your estate – before it becomes your family’s problem to deal with.

Everyone in the UK, regardless of marital status, is entitled to leave an estate worth up to £325,000 without having to pay any Inheritance Tax. This is known as the ‘nil-rate band’. Anything above that amount is taxed at an Inheritance Tax rate of 40%. If you are married or in a registered civil partnership, then you can leave your entire estate to your spouse or partner with no Inheritance Tax liability.

The estate will be exempt from Inheritance Tax and will not use up the nil-rate band. The unused nil-rate band is transferred to your spouse or registered civil partner on their death. Should you and your spouse pass away, the value of your combined estate must be valued at more than £650,000 before the estate would face an Inheritance Tax liability.

Considered ‘wealthy’

You don’t have to own a large estate to leave behind an Inheritance Tax bill. The nil-rate band has remained frozen at £325,000 since April 2009, much of the UK population’s wealth is invested in their property, a number of families are potentially being left with a significant Inheritance Tax bill to pay.

Residence nil-rate band

If you’re worried that rising house prices might have pushed the value of your estate into exceeding the nil-rate band, the new ‘residence nil-rate band’ could be significant. From 6 April 2017, it can now be claimed on top of the existing nil-rate band. The new allowance can only be claimed by the estates of people on property that is or was at some point in the past, used as their main residence and forms part of their estate on death.

It’s only available to homeowners who plan on leaving their residence to ‘direct descendants’, such as children or grandchildren or step children. If you wish to leave your home to someone else, the new allowance can’t be claimed.

Tapering effect

Anyone without a property worth at least £175,000 per person, or £350,000 per couple (in 2020/21), will partially benefit. The residence nil-rate band reduces for estates worth more than £2 million by £1 for every £2 above the taper threshold. Because of this tapering effect, there is a point at which claiming the allowance is ruled out completely.

Your estate may still be able to claim the residence nil-rate allowance even if you’ve already sold your home, e.g. because you are in residential care or living with your children. If your home was sold after 8 July 2015 and you plan on leaving the proceeds to your direct descendants, there are provisions in place that will allow your estate to claim the new allowance. This doesn’t apply to homes sold before 9 July 2015.

Planning ahead

In addition, the proceeds payable from any life insurance policies written in an appropriate trust will not form part of your estate and so will not further add to a potential Inheritance Tax bill.

Estate planning will enable you to maximise your wealth and minimise Inheritance Tax.

To have a comprehensive review and consider the tax-efficient solutions contact us on 028 9262 2910 to arrange a free consultation.