Tax thresholds frozen until 2028. What does that mean for you?
Autumn Statement 2022 – “Tax thresholds frozen until 2028” – here are five things you might not know about Inheritance Tax
Richard Guy – Gotelee Solicitors LLP
The Chancellor, Rt Hon Jeremy Hunt, has just announced that the Inheritance Tax (IHT) nil rate amounts will be frozen until April 2028; meaning a lot more of us may be paying this tax from our estates. Planning for the future has become even more important, but it is a complex area of law and it’s worth getting professional advice for planning your estate.
Here are 5 things that you might not know about this tax.
- There is more to it than your ‘nil rate band’
You might have heard that everyone gets a nil rate band of £325,000, but for a couple it is also possible to transfer the unused nil rate from the first person’s estate. This means that a couple can enjoy £650,000 nil rate. It is also possible to claim a residence nil rate and a transferrable unused residence nil rate from the first spouse’s estate if the circumstances qualify for it. Normally, this means leaving a residential property which was your home to lineal descendants. So, a married couple with a house can potentially enjoy up to £1 million of nil rate.
- The tax rate is not always 40%
You might be aware that the tax rate for estates on death is 40% of the capital value of the estate at death, but it is possible for a lower tax rate to apply. If you leave 10% or more of your estate to charity, then not only is that part of your estate exempt from IHT, but the estate passing to chargeable beneficiaries will enjoy a lower tax rate of 36%. You will need to be careful about what qualifies as a 10% share of the estate and that your Will is correctly drafted.
- The residence nil rate can still apply if you downsized
Normally, you need to own a property at the date of death and leave this to lineal descendants to qualify for the residence nil rate amount of £175,000. However, it may be the case that you have sold that property during your lifetime or downsized. There are provisions in the tax law that mean you can still enjoy the residence nil rate in those circumstances. The downsizing rules are very complex and advice should be taken.
- A business might not suffer IHT
If you have an interest in a business or assets used in a business, then it is possible that there will be up to 100% relief. A careful analysis needs to be undertaken as to whether the business qualifies. You will need to make sure that you have owned it for the requisite period and it is a genuine trading business. It is also important to make sure the Will is structured correctly, so this relief is not wasted or lost.
- IHT is not just payable on death
Although most people are aware that IHT could be paid when somebody dies, this tax also applies to Trusts. Any Trust that falls under what is known as the “relevant property regime” can be taxed under this legislation. The rate is not 40%, but is calculated every 10 years and can be up to 6% of the capital value of the Trust over the applicable nil rate amount. There is a similar charge for funds exiting the Trust, for example when paid out to beneficiaries. It is important to make sure if there is a Trust that you have set up or that has arisen out of a Will when somebody has died that you take advice on the tax position and make sure that it is registered with HMRC’s Trust Registration Service and annual tax returns and IHT tax returns are carried out.
What to do next?
IHT is a complex area and the impact of this tax will vary considerably depending on your circumstances. It is always advisable to take professional advice on this before taking any steps.
If you would like to know more, then please contact Richard Guy at Gotelee Solicitors LLP at 19 Deben Mill Business Centre, Old Maltings Approach, Woodbridge, Suffolk, IP12 1BL Tel: 01394 388605 and email: Richard.guy@gotelee.co.uk We can then look at what is most suitable for you.
