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Where there’s a Will, there’s a Relative (and Inheritance Tax)

By Andy Hearne 24th March 2016

This article was originally published on Quadrant Group’s website. Quadrant Group was acquired by Progeny in March 2017.

Change is inevitable in many aspects of life and never more so than in the world of finance. Our attempts to help educate and inform clients with our regular blogs strive to keep pace with the changes to taxation and legislation and how these may affect you.

As a regulated firm of Financial Planners, we’re focused on being well-informed and staying up to date so we can continually and consistently help our clients to plan for their future, implement robust financial strategies, and adapt accordingly to whatever changes they face along the way. So, we’re always alert to embracing change and this week is no exception with the upcoming changes to inheritance tax.

Losing a loved one can be one of the hardest challenges we endure in life. And yet, at this difficult time, we may also be burdened with a long and arduous process of probate and the intertwined inheritance tax liabilities.

What Is Inheritance Tax?

Succession Duty (now known as Inheritance Tax) was first introduced in English Law in 1853. The aim was to help address the rich-poor divide by spreading wealth amongst future generations. Today, inheritance tax affects one in three UK homeowners.

The basic rules of inheritance tax are relatively simple. Each individual is entitled to the so-called Nil-Rate Band, which is currently £325,000. This means that there is no inheritance tax payable on estates valued up to £325,000. Anything above the Nil-Rate Band is subject to inheritance tax at the rate of 40%, subject to certain exemptions such as charitable donations.

Transfers between spouses and civil partners are free of inheritance tax but Nil-Rate Bands can be combined, so couples are entitled to a combined Nil-Rate Band of £650,000.

Estates are valued for inheritance tax purposes at the date of death. However, where it gets complex is the rules and regulations surrounding any gifts made within the last 7 years. HMRC takes into consideration these gifts as part of the overall estate and then deducts any ‘allowable exemptions’*.

How is Inheritance Tax Changing?

Property prices have soared in recent years and the average house price in London is now £549,000. This has brought many more families into inheritance tax territory and critics argue that it is no longer a tax for the wealthy, but a tax for the masses.

To address this, from April 2017 the Government will be introducing the Family Home Allowance. This allowance will be added to the current Nil-Rate Band and will be phased in over 4 years, rising from £100,000 to £175,000 in 2020.

This additional allowance means that spouses and civil partners will be able to pass on assets to their children or grandchildren (including their family home) worth up to £1m without paying any inheritance tax, as shown below:

Tax Year Nil-Rate Band Family Home Allowance Total Couples
2017/18 £325,000 £100,000 £425,000 £850,000
2018/19 £325,000 £125,000 £450,000 £900,000
2019/20 £325,000 £150,000 £475,000 £950,000
2020/21 £325,000 £175,000 £500,000 £1,000,000

Those who choose to downsize to a smaller property in later life will be entitled to an Inheritance Tax Credit, so they still qualify for the new threshold, provided the bulk of their estate is left to their descendants.

In a joint article, PM David Cameron and Chancellor George Osborne said, “It can only be right that when you’ve worked hard to own your own home, it will go to your family and not the tax man.” However, Labour leader Jeremy Corbyn suggests that inheritance tax should be “graded” because the current single rate means the “very richest become richer”.

How Can We Reduce our Inheritance Tax Liability?

These changes to inheritance tax are welcome news to many families, but inevitably they do not resolve the issues for everyone. However, there are ways to reduce or even eliminate your inheritance tax liability, but these require planning well in advance with an experienced and qualified professional, who would take into consideration all of your financial objectives and requirements. If you’d like us to help you review your situation and estate plans, please get in touch.

What are your views on inheritance tax? Is it a fair tax? Should it be graded or perhaps scrapped altogether? Let me know by leaving a public reply below or emailing me directly at [email protected].

* Please note, it’s worth understanding your ‘allowable exemptions’ and the differences between a ‘Potentially Exempt Transfer’ and a ‘Gift with Reservation’. Unfortunately, we’ve not got time to go into these rules here, but if you’d like more information, please get in touch.

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This article does not constitute financial advice. Individuals must not rely on this information to make a financial or investment decision. Before making any decision, we recommend you consult your financial planner to take into account your particular investment objectives, financial situation and individual needs. Past performance is not a guide to future performance. The value of an investment and the income from it may go down as well as up and investors may not get back the amount originally invested. This document may include forward-looking statements that are based upon our current opinions, expectations and projections.

This article is distributed for educational purposes and should not be considered investment advice or an offer of any security for sale. This article contains the opinions of the author but not necessarily the Firm and does not represent a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable but is not guaranteed.

Past performance is not indicative of future results and the value of investments can fall as well as rise. No representation is made that the stated results will be replicated.

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