Does your Will take advantage of the new inheritance tax allowance?

Nobody wants to see their hard-earned cash go to the tax man when they die, but until recently if your estate was worth more than £325,000 you faced the prospect of having to pay inheritance tax at a rate of 40 per cent.  There were, and continue to be, ways to reduce your potential liability but none are straightforward.  The good news is that, as of 6 April 2017, new rules were introduced which should allow most people to reduce their inheritance tax liability with a bit of forward planning.

Michael Cavalla, private client lawyer with Forrester Sylvester Mackett, explains.

New rules

The new rules allow most people who die on or after 6 April 2017 to leave their interest in the family home to their children, grandchildren, great-grandchildren or any other direct descendant either completely free of inheritance tax or at least at a reduced amount, depending on how much the property is worth.  This is achieved by the introduction of a new allowance called the ‘residence nil rate band’ which effectively increases the value of the assets you can pass on when you die before any tax must be paid.

The definition of children and grandchildren includes step-children, adopted children and foster children.

 How does the allowance work?

The allowance enables a certain proportion of the value of the family home, up to a fixed amount, to be passed on to direct descendants of the person who has died.  This amount varies depending on the year of death.

For deaths between 6 April 2017 and 5 April 2018 Up to £100,000 of the property’s value can be passed on tax free
For deaths between 6 April 2018 and 5 April 2019 Up to £125,000 of the property’s value can be passed on tax free
For deaths between 6 April 2019 and 5 April 2020 Up to £150,000 of the property’s value can be passed on tax free
For deaths between 6 April 2020 and 5 April 2021 Up to £175,000 of the property’s value can be passed on tax free
For deaths from 6 April 2021 onwards The amount that can be passed on will go up in accordance with the consumer prices index

The allowance is in addition to the existing inheritance tax allowance of £325,000, meaning that if, for example, a person died on 7 April 2017 it should be possible for them to pass on up to £425,000 before any tax becomes due: £100,000 relating specifically to their main residence plus the usual £325,000, which can also be set against the main residence if needed as well as other assets.

For estates worth more than £2 million the amount of the allowance is reduced on a sliding scale.

How can I take advantage of the allowance?

To take advantage of the allowance you will need to have owned a residential property that you have occupied as your main home, either at the time of your death or sometime before.  This ensures that people who have chosen to downsize or have had to sell their home to fund the costs of a care home may still benefit from the allowance if there is any money left over from the sale proceeds when they die.

What do I need to do to ensure my family benefits?

To ensure your family benefits from the new allowance you need to make an appointment with your solicitor to review your financial affairs, and in particular the terms of your Will. You will need to think about:

  • whether you want to change your Will to benefit your children and grandchildren by leaving them a share of the family home;
  • which home you wish to benefit from the allowance if you own more than one, as it can only be used against one property;
  • how your decision will affect anyone else who has an interest in the property, such as your spouse or civil partner; and
  • whether there is anything in your current Will that will prevent the allowance being claimed, such as the use of a discretionary trust.

If the family home is owned by you and your spouse or civil partner, you need to find out whether you own it as joint tenants or tenants in common.  If you own as joint tenants it will not be possible for the allowance to be used by the first of you to die as your interest will automatically pass to the surviving joint tenant. However, it may be possible for the allowance to be transferred to the survivor so they can benefit from it when they die.

There may be very good reasons why you and your spouse or civil partner own the property as joint tenants, but if there is not then it may be worth considering changing your ownership status to that of tenants in common.

The rules concerning property ownership and transfer of the allowance are complex, so specialist legal advice needs to be taken.

For a confidential discussion about the new inheritance tax rules, or any other estate planning matter, please contact one of our experienced team at your nearest office.