Inheritance Tax is the most emotive of all the taxes. As a result of this, planning is often delayed and family discussions are put off. It can, therefore, be the most difficult tax to ensure families take the necessary time to plan for. As a tax advisor, this can be quite frustrating, with many labelling Inheritance Tax as a voluntary tax, as with timely planning a family can protect their estate significantly for future generations.
Many will be aware that each individual has an exemption threshold of £325,000 before an estate is subject to Inheritance Tax, and this has been frozen for many years now. This amount can be offset against any assets held on death and it can be passed on to the spouse or civil partner.
What many people are unaware of is the additional threshold being phased in until its full implementation in April 2020. This is the residence nil rate band of £175,000 per individual. This additional band was designed to give a married couple or civil partnership the headline £1million exemption from Inheritance Tax. However, it has been introduced in a far more complex way than to simply increase the standard nil rate band.
Unlike the £325,000 threshold, there are a whole host of conditions you need to understand to ensure you benefit from the £175,000 residence nil rate band.
The additional band relates to property that is in the death estate and was once your main home. It must be passed on to direct descendants and if the value of your estate is worth over £2.35million by 2020 then you will not benefit from this additional band at all. There are numerous other considerations, for example, if you are to downsize your property and hold multiple properties on death. However, this blog is not exhaustive and is to simply highlight the need to seek advice in this area.
As part of your family Inheritance Tax planning, you should understand if you can benefit from this relief, after all, it could exempt up to £350,000 of your estate, providing a tax saving of £140,000. If you do benefit then in addition to knowing this, you need to understand how you hang onto the relief. The last thing you want is to be caught out by a change in circumstances that impacts this.
We also find two aspects are often overlooked and prevent families benefiting from this relief. Firstly, where families want to leave their home in trust on death. If this trust doesn’t mean the property forms part of the beneficiaries estate this will not fulfil the passing on to a direct descendant condition, therefore a discretionary trust would prevent this relief from being received. Secondly, whilst a large proportion of business owners’ estates may be exempt under the Business Property Relief or Agricultural Property Relief rules, those exempt values are still taken into account for the purposes of establishing the size of the estate for the residence nil rate band. Therefore families with sizeable businesses will not qualify for this relief and it is important that they are aware of this.
In summary, it’s important to seek advice from an experienced tax adviser and to ensure you do so leaving the family plenty of time to consider their options. It is not an area of tax that families should rush into, but it is certainly not an area of tax that families should delay. Starting to consider this early on as part of your family’s wider financial planning means you have the time to consider your options carefully.