IHT: The devil is in the detail

IHT: The devil is in the detail

The devil is
in the detail
Clive Barwell, Head of Later Life Advice at Wren Sterling, analyses the detail in the government’s new inheritance tax changes.

HMRC has published more details of the changes to the IHT nil-rate band (NRB), as follows:

INHERITANCE TAX AND THE MAIN RESIDENCE NIL-RATE BAND

The government will introduce an additional nil-rate band when a residence is passed on death to direct descendants. This will be £100,000 in 2017-18, £125,000 in 2018-19, £150,000 in 2019-20, and £175,000 in 2020-21. It will then increase in line with CPI from 2021-22 onwards. Any unused nil-rate band will be transferred to a surviving spouse or civil partner. It will also be available when a person downsizes or ceases to own a home on or after 8 July 2015 and assets of an equivalent value, up to the value of the additional nil-rate band, are passed on death to direct descendants. This element will be the subject of a technical consultation. There will also be a tapered withdrawal of the additional nil-rate band for estates with a net value of more than £2million. This will be at a withdrawal rate of £1 for every £2 over this threshold.

Far from the headline-grabbing £1m per couple, the increase will only result in a maximum nil-rate band for those qualifying (and dying on or after 5 April 2017) of £850,000. This will be made-up of the current basic nil-rate band of £325,000 plus the new property-related element of £100,000. The additional element will then increase in increments of £25,000 over the ensuing three tax years, with the combined £500,000 nil-rate band (£1m per couple) starting on 5 April 2020.

Anyone who sold their home, either to raise cash or to downsize, before 8 July 2015 won’t get any of the increased nil-rate band when they die. Anyone doing so after 8 July 2015 will still qualify for the additional threshold, but the details of how this will work are yet to be published.

For those not able to benefit from the new threshold because they either have no children or grandchildren to benefit and/or their property value is insignificant in relation to other assets – there is a sting in the tail. The basic nil-rate band of £325,000, which had been frozen since April 2009 and was due to be unfrozen in April 2019, will now remain the same until April 2021; 12-years of an effectively increasing tax burden.

The good news is that, from April 2021, the nil-rate bands, basic and property-related, will be linked to CPI. The bad news, of course, is that CPI is likely to significantly lag behind long-term asset growth, particularly property prices.

As ever, the devil is in the detail. So if you’re unsure about any of these changes and how they might affect your financial position, how this change affects your financial position, please contact your Wren Sterling adviser or call us on 0344 346 3651.

Your tax situation will depend on your personal circumstances so we recommend you obtain independent tax advice.
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