Budget 2015 – Inheritance Tax Changes
So, the Chancellor has now delivered his seventh Budget and one of the main announcements made was that the Inheritance Tax nil-rate band (the amount you are allowed to leave on death before being taxed) will be increased (and you may be thinking ‘about time!’).
Let’s look at the announcement in detail and decipher what this means for us taxpayers when we die.
The current position
In summary, each individual has a nil-rate band allowance of £325,000, which they can leave to anyone before paying Inheritance Tax. If an estate exceeds this amount, then Inheritance Tax is charged on the difference at a rate of 40%. However, if you are married and leave everything to your spouse, then no Inheritance Tax is payable regardless of the value of the estate, as transfers between spouses are exempt from Inheritance Tax. Then, when the second spouse dies, they can claim the unused allowance from the first spouse and therefore have an allowance of up to £650,000 on the second death.
The Nil Rate Band has been frozen at £325,000 until the end of 2020-2021.
The above situation will still apply, however an additional nil-rate band will be introduced when the deceased’s residence is left to one or more direct descendants on death. So you may be wondering, what exactly is a direct descendant? A direct descendant could be a child of the deceased (including a step-child, adopted child or a foster child), or their lineal descendants.
So, what will the additional nil-rate band be? The additional band will be phased in as follows:
After this time, the band will rise in line with the Consumer Price Index.
Therefore by 2020-2021, if a married couple leave everything to each other and then their children, on the second death, there could be a nil-rate band allowance of up to £1 million. Single parents could have an allowance of up to £500,000.
In any given situation, the additional nil-rate band will be the lower of the value of the interest in the property, or the maximum amount of the nil-rate band. This is because the intention is that the additional nil-rate band will only apply to the deceased’s residence.
The additional band allowance can only apply to one residential property and, where the deceased owned multiple properties, the personal representatives of the deceased can choose which property it should apply to. However, a property that was never a residence of the deceased cannot qualify.
In estates where the net estate is worth more than £2 million, the additional nil-rate band will be tapered away by £1 for every £2 that the net value exceeds the nil-rate band and the tape threshold will rise in line with the Consumer Price Index from 2021-2022 onwards.
In a situation whereby a person downsizes their property to a smaller, cheaper one before they die that results in a loss of part of the maximum additional nil-rate band, that person will still be able to claim that part of the band. This provision is included to help not discourage people from downsizing, otherwise people would simply stay in more expensive properties that they perhaps do not need simply to make the most of their allowance. Further details on how this will work in practice will be published in September 2015.
Overall, the proposals have been introduced to make it easier for families to pass on their family home to their direct descendants and to reduce the burden of Inheritance Tax. It must be noted however, that the proposal will not come into effect until April 2017.
In light of the changes, it is recommended that you review your Will position. Please feel free to contact Jenna Dunstall who will be pleased to discuss matters with you in more detail.