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Inheritance Tax – Changes afoot

10 July 2015      Steve Hudson

“Death and taxes may be inevitable, but they shouldn't be related.”
(J.C. Watts, Jr. U.S. House of Representatives 1995-2003)

Following the changes to the inheritance tax legislation announced in the Summer Budget on 8 July 2015, it may be useful to look at how we have arrived at the latest announcements.

When George Osborne was Shadow Chancellor, in October 2007, he delighted the Conservative Party conference in  Blackpool by announcing that; "The next Conservative government will raise the inheritance tax  threshold to £1 million,"  warming to his theme he continued,  “That means we will take the family home out of inheritance tax. In a Conservative Britain only millionaires will pay death duties." This announcement had an almost immediate effect on the inheritance tax regime. 

When the then (Labour) Chancellor Alistair Darling  announced in his pre-budget report, published only days after George Osborne dropped his well-timed bombshell, that he was allowing married couples and civil partners to inherit from their late spouse/partner, any unused  nil-rate band allowance (the threshold over which inheritance tax becomes payable), he rather stole George’s thunder. At a stroke the nil-rate band available was doubled, something previously only achievable through astute will planning and the careful use of trusts.

It is worth noting that when these announcements were made in 2007, the nil-rate band applying to estates was £300,000. Today, 8 years later, it stands at just £325,000 representing an average compounded rise of just 1.00% per year; it has not risen year on year since April 2009.

Well, we know what happened at the election which followed this fiscal jousting between Chancellor and Shadow Chancellor. In 2010 the electorate failed to deliver a majority to any one party and, from 2010 to 2015, Britain was governed by a coalition government for the first time since the Second World War. Within the constraints of that coalition government (with the Liberal Democrats), George Osborne’s plans to increase the inheritance tax threshold had to be put on the back burner.

However, fast forward five years and we found ourselves awaiting the first budget from a majority Conservative government since Kenneth Clarke posed with the famous red box  outside number 11 Downing Street in November 1996. 

Amongst other measures announced in his Summer Budget 2015, George Osborne has now revealed how he intends to reform the inheritance tax regime. It has been a long time coming since his first announcement in 2007.

Let’s look at these changes in more detail and highlight how they could work in practice:

•    The nil- rate band, currently standing at £325,000, will remain frozen at this level until April 2021.

•    Perhaps the most eye-catching announcement made and certainly the most radical change was the introduction of a ‘Main residence nil-rate band’

•    This is an additional allowance and will be available when a residence is passed on death to direct descendants. Starting at £100,000 in tax year 2017/18 it will rise to £125,000 in 2018/19, £150,000 in 2019/20 peaking at £175,000 in 2020/21. It will then increase in line with inflation (using CPI - the Consumer Prices Index).

•    The ‘Main residence nil-rate band’ will be transferable where the second spouse or civil partner of a couple dies after 5 April 2017, regardless of when the first of the couple died.

•    It will also be available when a person downsizes or ceases to own a home after 7 July 2015 and assets of an equivalent value, up to the ‘Main residence nil-rate band’, are passed on death to their direct descendants. This particular element of the new allowance will be the subject of a technical consultation.

•    For estates with a net value exceeding £2 million, the ‘Main residence nil-rate band’ will be withdrawn at £1 for every £2 over this threshold.

So what do these changes mean in practical terms for those wishing to arrange their affairs to minimise the inheritance tax due?

Firstly, whilst we should welcome the additional ‘Main residence nil-rate band’, the freezing of the main nil rate band for a further 6 years could be seen as a disappointment. By the time the rate is increased, the current nil-rate band of £325,000 will have remained unchanged for 12 years.

It would seem reasonable to expect that the principal nil-rate band allowance will increase at the same time as the review of the new ‘Main residence nil-rate band’ in 2021, with both allowances then increasing in line with CPI.

The fact that the new ‘Main residence nil-rate band’ will be made available to anyone who downsizes after 7 July 2015 should encourage those for whom downsizing would be a practical move. With this concession, they can press ahead without the worry that they may have lost a valuable inheritance tax allowance. However, for those taking this route, it may be worth considering the creation of a separate (investment or cash) fund to help identify the inheritance tax free part of the proceeds.

Other than these announcements, the inheritance tax landscape remains unchanged. The annual gift exemption remains at just £3,000 (unchanged since April 1981) and gifts on marriage/civil partnership remain at pre-budget levels. 

In conclusion, it would make sense for those who are concerned about potential inheritance tax liabilities, or anyone who has already put mitigation strategies in place, to revisit these in light of the changes announced in the Summer Budget. As ever, your COURTIERS adviser will be happy to guide you through the changes and highlight any areas in need of attention.

Stephen Hudson Dip PFS
Private Client Adviser

PS. Please remember that tax treatment depends on individual circumstances and is subject to change.

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