Inheritance Tax Update

Many of the headlines relating to the recently announced changes to the Inheritance Tax (IHT) threshold indicated that the threshold would be rising to £1million. However, whilst in some cases there will be a threshold of £1million, this won't necessarily be the case for many.

What's the current position?

When a person dies, their estate (all their assets less the value of any liabilities), is valued. The first £325,000 of the estate is charged to IHT at 0%. This is known as the "Nil Rate Band". Any excess over the Nil Rate Band is charged to IHT at 40% (or 36% if ten percent of the estate is left to charity).

Example: A person dies with an estate of £400,000. The amount exceeding the Nil Rate Band (£75,000) is charged to IHT at 40%, meaning tax of £30,000 must be paid.

However, spouses and civil partners can leave assets to each other free of IHT. In addition, if they leave the whole of their estates to each other, on the second death, the survivor's estate will have a Nil Rate Band that is doubled to £650,000.

Example: A married couple have combined assets totalling £500,000. They leave the whole of their estates to each other. On first death there will be no liability to IHT due to the spouse exemption. On second death the Nil Rate Band is doubled to £650,000. As the estate is less than that amount, there will be no liability to IHT.

The New Rules

It is reported that the Nil Rate Band will remain at £325,000 until the end of 2021.

What is being introduced is an additional allowance of £175,000 per person, to be used against the value of their main residence.

However, the additional allowance will only be introduced gradually from 2017, when £100,000 will become available. This will then increase by £25,000 each year until 2020, when the maximum of £175,000 is reached. The allowance will then increase in line with the Consumer Prices Index.

In the same way the existing Nil Rate Band can be transferred between spouses and civil partners, the new allowance will be able to be transferred, if unused on the first death. Therefore, from 2020, the maximum amount of an estate that will pass free of IHT will be £500,000 per person or £1million for a married couple or civil partners.

There are though certain conditions that must be met:

• The property must be a residence of the deceased - it cannot be a buy-to-let property;
• The property must be left to one or more of the deceased's direct descendants (children, grandchildren and so on);
• The person's estate does not exceed £2million. If it does, the additional allowance will be reduced by £1 for every £2 by which the estate exceeds £2million

Furthermore, there is help for those that wish to downsize their property or no longer own a residence because, for example, they have moved into a care home; if they have left their smaller residence (or the cash equivalent of their residence, where they no longer own a residential property), to their direct descendants, the additional allowance will still be available.

King's Lynn office (01553 778100): Simon Scott (simon.scott@mcp-law.co.uk), Margaret Taylor (margaret.taylor@mcp-law.co.uk) and/or James Davies (james.davies@mcp-law.co.uk)

Wisbech office (01945 464331): Sophie Putterill (sophie.putterill@mcp-law.co.uk) and/or Paul Garner (paul.garner@mcp-law.co.uk)

Peterborough office (01733 865880): Baljit Bem (baljit.bem@mcp-law.co.uk) and/or James Davies (james.davies@mcp-law.co.uk)

Thetford office (01842 756100): Priscilla Ivory (priscilla.ivory@mcp-law.co.uk) and/or Paul Hendriks (paul.hendriks@mcp-law.co.uk)