Newly-announced Inheritance Tax review could offer real chance for change
Despite the introduction of a new Inheritance Tax (IHT) allowance in 2017, as a result of increasing house prices and rising stock markets HM Treasury recovered more than £5 billion in death duties last year.
Under the current rules married couples and civil partners can inherit each other’s allowances – in total, £1 million of the couple’s estate can be passed on tax free.
But the application of the so-called family home allowance is far from simple. It only applies when a main residence is passed on to ‘close lineal descendants’ of the deceased. Exclusions include property held in trust and estates worth more than £2.25 million, while circumstances such as downsizing or selling a main residence to fund care home costs bring further complexities.
This government has commissioned an independent review and simplification of the existing IHT system. Abolishing the Residence Nil Rate Band, which is currently set at £125,000 and due to rise to £175,000 by April 2020, and increasing the Nil Rate Band allowance of £325,000 by an equivalent amount could still achieve the government’s pledge to introduce a £1 million tax-free allowance and also make the regime fairer for unmarried and childless beneficiaries.
At the same time it is hoped that consideration will be given to a long-overdue review of the annual gift allowance of £3,000, which has remained static now for more than three decades. Individuals can make larger lifetime gifts known as Potentially Exempt Transfers provided they are made at least seven years before death. A much under-used exemption also allows annual gifts out of income, provided the gift does not alter the donor’s standard of living.
In many cases, beneficiaries inheriting from their parents do so in mid-life or later, when they are financially secure, so increasing and simplifying gifting allowances could ease pressure on a younger generation struggling both to repay student finance loans and to take a first step on the housing property ladder. This approach would help a family to pass their wealth on down the generations and allow parents and grandparents the pleasure of seeing their gifts being put to good use.
If you would like more information about Inheritance Tax and the potential implications on your family, or to discuss your individual circumstances in confidence, contact our experienced specialist private client team on 01243 786668 or email us at firstname.lastname@example.org.General, George Ide, Investment, News, Private Client