Inheritance Tax – Getting your head around the new rules

In the words of Benjamin Franklin ‘nothing can be said to be certain, except death and taxes’.  Figures released from HMRC show a record £5.1 billion (up 9% on the previous year) collected from Inheritance Tax receipts in the year ending May 2017.  This shows an area of increasing revenue for the Government.

It is no longer correct to assume that Inheritance Tax only affects the very rich, with house prices increasing in many areas in the UK and Inheritance Tax thresholds frozen since 2010, many more families are now finding their estates could be liable to Inheritance Tax when they pass away.

Thresholds are currently set at £325,000 for an individual and £650,000 for married couples.  This means an individual or a couple can have assets up to these thresholds before tax is due. Although this sounds a considerable sum of money, it is important to remember that your estate comprises not only any property or properties you own but also possessions such as a car, jewellery and any savings you may have.

Since April, the Government have added an additional Main Residence Nil Rate Band to the existing Inheritance Tax threshold.  This additional allowance will be phased in over the next 4 years so that by 2020, individuals will have an extra allowance of £175,000 on top of the existing £325,000.  Like current Inheritance Tax thresholds, the Main Residence Nil Rate Band can also be transferred between spouses so married couples could potentially have an allowance of £1 million before tax is liable on their estates.

Although a welcome increase on the tax thresholds, this new allowance doesn’t escape restrictions and is only available to those leaving their main residence (or equivalent value) to their direct descendants i.e. children or grandchildren.  Other relatives such as niece’s nephews or siblings are unfortunately not included and if a mixture of family members are the main beneficiaries in a Will then the value of any home left as part of the estate will be apportioned to work out whether any tax is due.

If you are considering selling your home to downsize or having to sell it to go into care, you will still be able to take advantage of the new allowance by effectively getting an ‘Inheritance Tax credit’ giving you a tax break equivalent to the value of your original home. Again, in these instances both the lower value property and any remaining proceeds must go to direct descendants and for those going into care the remaining proceeds of sale must be left to direct descendants

But for those people who have incorporated trusts within their Wills the rules are more complicated as it depends on the type of trust you have as to whether the new allowance is applicable.  For example, it will not apply to those who have discretionary trusts within their Wills but can still be used by those who have incorporated life interest trusts within their Wills provided certain criteria are met as stipulated by HMRC

The rules around these recent changes to inheritance tax legislation are complex and we would recommend seeking professional advice to ensure that your Will takes advantage of these new rules.

So, whether you are looking to write a Will for the first time or to update an existing one then please contact Lisa Beale, Solicitor, Private Client Department on 02477 710232 or email lisa.beale@alsterskelley.com