New rules that will remove millions of family homes from inheritance tax (IHT) take effect within weeks – but many could miss out completely unless they urgently review their wills.
From April 6, each individual can claim an additional allowance of £100,000 so that less IHT may be paid when the family home is left to certain individuals. This allowances is on top of the existing £325,000 IHT exemption. This new tax allowance will rise to £175,000 by the 2020/21 tax year, potentially allowing a couple to pass on £1m estates free of IHT.
How does inheritance tax work?
Currently, spouses and civil partners can pass all their wealth to each other without paying IHT. However, IHT may be payable when it comes to cascading wealth down the generations. Subject to non-exempt lifetime gifts having been made, we can all pass on £325,000 – the “nil-rate band” – before IHT is due. Nil-rate bands can also be passed between spouses and civil partners.
This means that if a wife dies first and leaves everything to her husband, he can currently give away up to £650,000 IHT-free. IHT is charged at 40% on what’s left.
What will the new rules mean?
From April the new allowance, the residence nil-rate band (RNRB), will introduce the further reduction of IHT. This new allowance will begin at £100,000 per individual, rising to £125,000 in 2018, £150,000 in 2019 and £175,000 in 2020.
Like the basic nil-rate band, it is transferable between spouses and civil partners, which permits them potentially to pass on wealth up to £1m without incurring IHT.
The new allowance is available only when estates are directly inherited by children, stepchildren, adopted children or grandchildren and some other specified individuals. It will not apply if property is left to nieces or nephews, for example, or brothers or sisters.
It may not be available when property has been left in trust, or an age contingency is included for grandchildren for example, which is why wills should be revisited urgently.
If an individual’s estate is worth more than £2m, the RNRB is tapered down. If your estate if worth more than this you should still review your will and estate planning to see whether it is possible to arrange your affairs so that the RNRB can be claimed.
What else is changing?
The Government has announced it will introduce a rise in probate fees from May 2017.
Currently, a £215 flat fee applies if probate is applied for by friends or family, or £155 if a solicitor makes the application.
However, in May the system will be replaced by a sliding scale based on the value of an estate. The charge is paid in addition to IHT.
Estates below £50,000 will pay nothing at all – this applies to 58pc of all estates in England and Wales, according to the Government – but all estates worth more than £50,000 will be forced to pay increased fees. Those between £50,000 and £300,000 will pay £300; estates worth over £1m but less than £1.6m will pay £8,000; and those above £2m, £20,000.
How can Gotelee help?
We might not like the idea but the reality is that it is never too early to be thinking of making a Will. By doing so you are ensuring that your assets go to the people you wish them to. Put simply, planning for the future is not complete without a Will.
We can advise on the general procedures of administering an estate, obtaining the grant from the Probate Registry and distributing the estate in accordance with the Will or the intestacy rules if there is no Will.
Our specialist team of lawyers can meet you at one of our offices, Ipswich, Hadleigh, Felixstowe, Melton or Woodbridge and can guide you through the process of making a Will, to ensure all your wishes are carried out just the way you want.
To find out more, call Nicola Weldon on 01394 388605 or email firstname.lastname@example.org.