The arrival of new, more generous inheritance tax-free allowances sound great to most of us – the trouble is the new rules are downright complicated and does not benefit those of us who do not have “direct descendants” as defined by the new rules.
The former Chancellor, George Osborne, announced the changes in July 2015 to allow many middle-class families to leave more of the value of their property to their family inheritance tax free.
Soaring property prices
The idea was to bring down the tax bill for millions of normal British families whose parents’ or grandparents’ estates have soared in value due to two decades of raging property inflation.
In 2009, when the initial nil-rate band was set, just one in ten homes was sold above the threshold. By 2015, one in four homes went for more than £325,000.
There has been a long gap between the announcement in July 2015 and the anticipated introduction of the rules in April 2017. This has led to accusations that people with relatives who died between the previous budget announcement and this April, have lost out. Some campaigners even argue that 30,000 families should receive compensation.
Especially as the government raked in £4.7 billion in inheritance tax in the year to April 2016 – up 22 per cent on the year before and the highest take ever.
So, what exactly is going on?
Currently, inheritance tax is imposed at 40 per cent on estates above the main threshold, set at £325,000 for a single person. This doubles to up to £650,000 for married couples and civil partners who pass on their wealth to their surviving spouse and have not used any of their allowance themselves.
But as house prices escalate, more and more families have found themselves over the tax-free threshold when they inherit.
From 6 April, 2017 an additional ‘residence nil rate band’ of £100,000 per person will be introduced – effectively taking the threshold at which inheritance tax becomes payable to £850,000 for family beneficiaries.
For a person’s estate to benefit they must have passed away after 6th April 2017 and own a home or a share in one. It applies to a home you lived in at some point before you died and does not have to have been your main residence.
Crucially under the terms of your Will, or the rules of intestacy if you do not have a Will, the property must pass to direct descendants. In other words, children, grandchildren and other lineal descendants. This includes stepchildren, adopted children, foster children and children for whom a person was guardian. It does not include nieces, nephews or siblings. On this basis it is also being seen as discriminatory legislation.
- The threshold is due to increase again to £125,000 in the 2018/19 tax year, to £150,000 in 2019/20 and to £175,000 in 2020/21.
From 2021/22 the threshold will increase in line with consumer prices inflation.
- For estates worth in excess of £2 million the relief reduces by £1 for every £2 a person’s estate is over the threshold. If an estate is worth more than £2.2 million and they pass away in the tax year 2017-18 the relief is lost.
It is essential that clients review their Wills and take advice from specialist solicitors. It is important to understand how the new relief dovetails with other reliefs and how the new rules apply.
Partner at Wards Solicitors
Jenny is a member of SFE and Regional Coordinator for Bristol & Bath.
She is also a full member of STEP and holds their Advanced Certificate in Advising Vulnerable Clients.
She heads the Will, Probate and Mental Capacity Team at Wards.