George Square Financial Management explains the new rules around inheritance tax and how to protect your assets against unnecessary inheritance tax liabilities after your death.
The rules around inheritance tax changed in April this year, allowing for less inheritance tax to be paid when a family home is left to ‘direct descendants’ eg children or grandchildren. The introduction of the residence nil-rate band is good news for married couples, but not every estate can claim it. The bottom line is; if you want control over what happens to your assets after your death and to pass on as much of your wealth as possible, effective estate planning is essential.
The nil-rate band
Every individual in the UK, regardless of marital status, is entitled to leave an estate worth up to £325,000 without having to pay any inheritance tax. This is known as the ‘nil-rate band’. Anything above that amount is taxed at 40%. If you are married or in a registered civil partnership, then you can leave your entire estate to your spouse or partner with no inheritance tax liability.
The estate will be exempt from inheritance tax and will not use up the nil-rate band. Instead, the unused nil-rate band is transferred to your spouse or registered civil partner on their death. This means that should you and your spouse pass away, the value of your combined estate has to be valued at more than £650,000 before the estate would face an inheritance tax liability.
You don’t have to own a very large estate or even be considered ‘wealthy’ to leave behind an inheritance tax bill.
The nil-rate band has remained frozen at £325,000 since April 2009, but the average price of a UK property has risen significantly since then. With much of our wealth invested in property, a growing number of families are being left with an inheritance tax bill to pay.
The new residence nil-rate band
If you’re worried that rising house prices might have pushed the value of your estate over the nil-rate band, then the new ‘residence nil-rate band’ could be significant. From 6 April 2017, homeowners who plan on leaving their residence to ‘direct descendants’, such as children, grandchildren or step children can now claim the residence nil-rate band on top of the existing allowance providing the property is, or was at some point in the past, used as their main residence and forms part of their estate on death.
If you don’t have any direct descendants, or you wish to leave your home to someone else, the new allowance can’t be claimed and you will need to look into other options for reducing your inheritance tax liabilities.
Even if you’ve already sold your home, for example, because you are in residential care or living with your children, your estate may still be able to claim the residence nil-rate allowance. If your home was sold after 8 July 2015 and you plan on leaving the proceeds to your direct descendants, then there are provisions in place that will allow your estate to claim the new allowance.
Estate planning will enable you to maximise your wealth and minimise inheritance tax.
The rules around inheritance tax are complex, but if you plan ahead, certain gifts made during your lifetime could reduce the amount of inheritance tax payable on your death as well as any proceeds payable from any life insurance policies written in an appropriate trust as they will not form part of your estate.
Seek professional advice
The right tax planning solutions for you will depend on your personal circumstances. Our independent financial advisers can work with you to discover what these are and whether you can take advantage of the new inheritance tax rules.