What will Inheritance Tax look like in a post brexit and covid world?
The Chancellor announced in the Spring Budget last month that there would be no planned changes to the current rules on the tax free amount a person has before inheritance tax is liable on their estate, until at least April 2026.
Since 2009, the nil-rate band of tax per person has been £325,000 (£650,000 per couple who are married or in a civil partnership). The nil-rate band is the amount of a person’s estate which is taxed at 0%. Anything above this is then subject to inheritance tax (IHT) at 40% after any allowable deductions, exemptions and reliefs.
With the nil-rate band now frozen until at least 2026, despite likely rises of inflation and substantial increases in house prices , this will translate to an incredible 17 years in total without an increase to the nil-rate band, bringing a lot more people into the ‘IHT net’, including many who may not consider themselves to be particularly wealthy.
In addition to the nil-rate band at our disposal when we are tax planning for our estate, there is also the residence nil-rate band (RNRB) which was introduced from 6 April 2017 and now sits at £175,000 or £350,000 per couple. This may soften the blow for those who have homes that have substantially increased in value, there are still some issues.
With the introduction of RNRB, coupled with a person’s nil rate band, the government claimed at the time that the addition of the RNRB meant that couples could give away a £1 million of their estate to loved ones after their death, free of IHT.
But actually the only couples who can enjoy these valuable tax reliefs are those that were married or in a civil partnership only, the value of both spouses estates does not exceed £2 million, their main residence or home is worth more than £350,000 and they leave their estate to a direct descendant, like a child. So those who are unmarried, do not own a property or do not have children, will lose out.
What exemptions are available?
There are several exemptions and reliefs to couple to help reduce their overall IHT liability.
The ‘spouse exemption’ is one that is available to most couples. If one half of a couple dies before another and then transfers their full estate to their surviving spouse, there is no IHT payable at the time of death of the first spouse. However, again, this exemption is not available to those couples who are co-habiting or in long-term relationships; couples need to be married or in a civil partnership.
If you are a business owner and/or own agricultural property, there are further exemptions available whereby you can give away your assets IHT free, but the rules are complex, and worth speaking to a tax adviser. Contact us if you want to discuss further.
What can you do now to help reduce your IHT liability?
IYou have the option whilst you are alive to gift your assets to help reduce your IHT liability at the time of death for loved ones left behind.
There are no limits on how much of your assets you gift, provided that you survive seven years after making the gift. If the gift is made and you die 3 or more years later, there is a tapering in the IHT liability. The rules are strict on gifting, however, for example you can gift your home to a family member and continue to live in the property rent free.
What changes lies ahead for IHT?
The Government set up an All-Party Parliamentary Group in 2019 to look at how IHT could be reformed. So far, recommendations indicate to an increase of IHT for wealthier individuals, removal of the spouse reliefs mentioned above, and potential loss of business relief and agricultural property relief.
