What you need to know about the new inheritance tax rules, will your estate now be free of inheritance tax?


Passing on your home or preserving the family’s inheritance is often a key concern for many people. The summer budget of 2015 announced the biggest inheritance tax change this decade. The new ‘residence nil rate band’ increases the current inheritance tax threshold from £325,000 to £500,000 if your estate qualifies.

Current Rules

At present, each individual has a tax free allowance of £325,000. Anything above this allowance is taxed at 40%, although the tax rate it is reduced to 36% if you leave at least 10% of your estate to charity.  

If you are either married or in a civil partnership then you can transfer your spouse or partner’s unused tax free allowance on their death. This is because transfers between spouses and partners are always free of inheritance tax. Therefore, if you leave your entire estate to your spouse or partner there will not be any tax to pay on your death and then when your partner dies they will have a tax free allowance of £650,000.

From April 2017

The inheritance tax threshold will gradually increase by £175,000 per person by 2020/21,  increasing the total inheritance tax free allowance to £500,000 per person and £1,000,000 for a couple. This additional allowance is only available when you leave your home to your descendants.

How will the rules apply to you

If I leave my home to my step children will this apply?

Yes. The legislation includes step children, adopted children and grandchildren.

I do not have children. Can I leave my home to my nieces and nephews?

No. The legislation restricts the new allowance to direct descendants only.

My home is worth less than the allowance. What happens in that case?

The allowance applies only to the value of your residence.  If your home is worth less than the new allowance then the surplus tax free allowance will be lost and cannot be applied to any of your other assets.

Do I need to change my Will?

You should review your Will with a solicitor to ensure that your family can take advantage of the new allowance following your death.

Example

Mr and Mrs Smith have an estate worth £1,000,000. The estate compromises of savings and investments of £650,000 and the family home worth £350,000.

Mr Smith dies and leaves his entire estate to Mrs Smith.  Mrs Smith dies and leaves her entire estate to her children.  There will be no inheritance payable on Mr Smith’s death.  The tax calculation on Mrs Smith’s death will be:

Before April 2016

Estate of £1,000,000 with a property value of £350,000

Less: £650,000 nil rate band taxed free of tax

£350,000 taxed at 40% = Inheritance Tax Bill of £140,000

After April 2021/2021

Estate of £1,000,000 with a property value of £350,000

Less:

£650,000 nil rate band taxed free of tax

£350,000 residence nil rate band

£0.00 taxed at 40% = Inheritance Tax Bill of £0.00

Conclusion

Many families who might have been subject to a large inheritance tax bill could now pass their family home on free of tax. Couples who leave their entire estate to each other and then their children will have an inheritance tax free allowance of £1,000,000.

Jessica Morton is a solicitor with Newcastle law firm Sintons. To speak to her about this or any other matter, contact her on Jessica.morton@sintons.co.uk or 0191 226 7801.


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