Inheritance tax – the good, the bad and the not so bad after all

Inheritance tax. Some hate it. Others, not so much. It takes all sorts. Whatever your position, there’s no denying that the reforms introduced by this summer’s Budget will mean a considerable proportion of the population will be better off.

At the moment, there’s a tax free allowance (also known as the ‘nil rate band’) of £325,000. This means that the value of your estate up to £325,000 will not be subject to inheritance tax (IHT), which is currently set at 40%. What the reforms will do is create a new tax-free allowance, which will come into play in addition to the existing one. The new allowance will apply if you pass on your main home to your children or grandchildren, and will kick in from April 2017. What’s more, the allowance will increase year by year up until 2020.

When it comes into effect in 2017, the new allowance will be £100,000. It’ll then increase year by year: up to £125,000 in 2018, £150,000 in 2019 and £175,000 in 2020. So, by 2020, we’ll have gone from having one tax-free allowance of £325,000 to having two, with a combined maximum of £500,000. And as with the existing allowance, you’ll be able to transfer this one to your spouse or civil partner should they survive you. So for some, this will eventually raise the tax free allowance to £1million.

But while the new allowance will be welcome news to a lot of people, it’ll benefit some more than others. If your estate is valued at more than £2 million, the additional relief will gradually be tapered away.

So what does this mean for you?

So now you know how the current rules on IHT will change. But what does it mean for you?

Well, it won’t mean that you’ll be worse off if you choose to downsize or stop being a homeowner. For example, if downsizing results in the value of your main home being less than the new additional allowance, then IHT won’t be payable on assets you leave to your children or grandchildren up to the value of that difference. And if IHT won’t be payable on those other assets, you might not need to worry about leaving them as gifts (which, as long as they’re given more than 7 years before you pass away, aren’t subject to IHT). But (and there’s always a but, isn’t there) as with most rules, there are some exceptions. Not all gifts are exempt from IHT, so you should still think carefully about what you’re giving as a gift.

These reforms also mean that if you were planning on downsizing in order to reduce the amount of IHT due on your estate, you don’t need to worry about that so much any more. The new allowance means that, for many of us, our IHT liability will either be reduced or disappear altogether.

Depending on the value of your main home, you might not need to think about putting your property into trust solely to limit your IHT liability.

Plan, plan, plan

Yes, it might not be fun. And it’ll probably take you a bit of time. Oh, and it may well be the source of a fair amount of disagreement (to put it mildly). But one thing these reforms don’t change is the fact that you should plan carefully who is going to get what. And a good way to do that is to create a will. So, because we’re so nice, here’s a link to our will template which you can create, customise and download for free.

Create a will

And if all this talk of tax and wills has left you feeling a little dazed, we recommend ice cream, a deck chair and the back garden.

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