Without the right advice and careful financial planning, HM Revenue & Customs could become the single largest beneficiary of your estate following your death.
Clarke Nicklin Financial Planning Partner and IFA Scott Herbert explains more:
Inheritance Tax (IHT) is payable by some people that, for the most part, could have been avoided. If you want your estate to go to your loved ones with the minimum amount of IHT payable, you should obtain professional advice. There are currently a number of generous reliefs relating to IHT. Indeed, if the correct planning is started early enough, it may be possible to avoid IHT altogether.
New main residence transferable nil-rate band
From 6 April 2017, there will be a new main residence transferable nil-rate band (family home allowance) that will apply when a main residence is passed on to a direct descendant. This new main residence transferable nil-rate band will work alongside the existing IHT nil-rate band, which is currently £325,000. In the same way as with the current nil-rate band, any unused main residence transferable nil-rate band will be transferred to a surviving spouse or registered civil partner.
A property which was never a residence of the deceased such as a buy-to-let property will not qualify. The allowance will initially be set at £100,000 in 2017/18, increasing to £125,000 in 2018/19, £150,000 in 2019/20 and up to £175,000 in 2020/21 (and then increase each year in line with inflation (CPI)).
Inherited from a spouse
It is possible therefore that by 2020/21, an individual will have their own nil-rate band of £325,000 as well as a main residence transferable nil-rate band of £175,000 in respect of their main residence, plus a nil-rate band of £325,000 inherited from their spouse and a main residence transferable nil-rate band of £175,000 inherited from their spouse.
This gives the much advertised total of £1 million. It is worth noting that the current nil-rate band of £325,000 is now set to remain until 2020/21. There is also going to be a tapered withdrawal of the main residence transferable nil-rate band for estates worth more than £2 million.
Effect of the proposed changes
Few taxes are quite as emotive – or as politicised – as IHT. The structures into which you transfer your assets can have lasting consequences for you and your family. The current rate of IHT payable is 40% on property, money and possessions above the nil-rate band. The rate may be reduced to 36% if 10% or more of the estate is left to charity.
It makes sense to ensure that your affairs are structured in the most tax-efficient way possible. However, it isn’t easy to keep up with the many exemptions and reliefs available such as lifetime gifts, trusts, business and corporate structures, special concessions and charitable gifts.
One important way to minimise IHT is to make a Will, so as to leave your family with the maximum assets and at the least tax cost.
It’s important to obtain professional financial advice to ensure your needs are fully considered.
INFORMATION IS BASED ON OUR CURRENT UNDERSTANDING OF TAXATION LEGISLATION AND REGULATIONS. ANY LEVELS AND BASES OF, AND RELIEFS FROM, TAXATION ARE SUBJECT TO CHANGE.
TAX ADVICE WHICH CONTAINS NO INVESTMENT ELEMENT IS NOT REGULATED BY THE FINANCIAL CONDUCT AUTHORITY.