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Ask the Legal Expert - Important Inheritance Tax Changes

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While the National Insurance kerfuffle grabbed the headlines, there were other points of interest to emerge from the Spring Budget, with Inheritance Tax and Capital Gains Tax getting some attention from the Chancellor.

New rules on Inheritance Tax are set to lift millions of family homes out of the reach of Inheritance Tax entirely, with some key caveats. And anyone with an estate to pass on to their family should look the new rules carefully.

Currently set at 40 percent, Inheritance Tax is levied on everything that is left – cash, possessions or property - to a beneficiary.

At the moment, you have no Inheritance Tax to pay if your estate is worth less than £325,000, or if you leave everything to your spouse or civil partner, or to a charity or a community amateur sports club.

The 2017/18 tax year will see the introduction of a new home allowance or Residence Nil Rate Band (RNRB).

Under these new rules an estate will be entitled to this RNRB if:

  • The person dies on or after 6th April, 2017
  • They own a home or a share of a home with a value of less than £2 million
  • Their direct descendants – children, step-children, adopted children or grandchildren – inherit the home, or a share of it

An estate will also qualify if the owner has downsized to a less valuable property, if they have sold or gifted the home after 7th July 2015, or if they’ve moved into rented accommodation.

The maximum amount of the RNRB will go up annually from £100,000 in 2017/18 to £175,000 in 2020/21.

This new allowance is in addition to the existing nil rate threshold which sits at £325,000, so anyone eligible will eventually be able to pass on estates worth up to £500,000, tax free.

Married couples and civil partners are treated as individuals, so each can pass on their full allowance. So a couple can pass on estates worth up to £1 million to  direct descendants, including a family home, as long as this is their main property.

For estates valued at more than £2 million, the RNRB, and any transferred RNRB, will be gradually tapered. And RNIB will not be available to those without children, or to some business owners.

More About Nil Rate Bands

The increase in the Nil Rate Bands will affect many people, as far as Inheritance Tax is concerned.

From April 2017 there will be three Nil Rate Bands (NRB) to consider. The standard one has been a part of the legislation from the start of Inheritance Tax in 1986 and this remains fixed at £325,000 until 2021.

The facility to use any unused NRB of a deceased spouse was introduced in 2007, enabling many surviving spouses to have a nil rate band of up to £650,000.

From 6th April 2017, those eligible will be able to add £100,000 to their residence NRB, reaching a total of £425,000. This allowance will rise each year by £25,000 to 6th April 2020, taking this NRB up to £500,000.

Under these new rules, some eligible surviving spouses will be able to add £350,000 to their residence nil rate band, up to a total of £1,000,000.

As you can imagine, these changes will have an effect on the provisions many people have already made in their wills so it is important they review their current arrangements with their Solicitor, to ensure they are making the most of any new provisions.

Capital Gains Tax

There was also a tweak to Capital Gains Tax that is worth noting.

The current rates of CGT are 10 percent, to the extent that any income tax basic rate band is available, and 20 percent thereafter.

Higher rates of 18 percent and 28 percent apply for certain gains; mainly chargeable gains on residential properties that do not qualify for private residence relief.

The CGT annual exemption is £11,100 for 2016/17 and this will be increased to £11,300 for 2017/18.

Ian is a specialist in Wills & Probate, with more than 30 years’ experience. Primarily based in our Fishguard office, Ian's work covers the whole of Pembrokeshire, and he enjoys playing a key role in the local community.

For further advice, please contact our specialist Lifetime Planning solicitors in:

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The question posed in this blog is based on a hypothetical situation.