A guide to Inheritance Tax

The ‘residence nil rate band’ can result in an Inheritance Tax saving even if, due to the size of your estate, the prospects for meeting its conditions appear unpromising at first glance. 

Families are paying more in Inheritance Tax (IHT) than ever before. Official figures show that the amount collected last year exceeded £5 billion for the first time.

But if you enlist the advice of an expert accountancy practice like Manchester-based Tree Accountancy, you can start to secure your family’s financial future.

On the whole, property, asset and investment values have continued to rise.  It follows that so too have IHT liabilities.

“That’s not surprising,” said Nik Hynes, managing director of Tree Accountancy, “when you consider that the IHT nil rate band has remained at £325,000 per person since 2009 and will be fixed at this level until at least 2021.”

“Had the nil rate band been linked to the consumer prices index, it would be £385,000 today,” he says, “which would be a much better reflection of market forces.”

IHT revenues are expected to keep rising despite the new ‘residence nil rate band’ (RNRB) being introduced, initially at the level of £100,000 per person, increasing over the next three years to £175,000. This works on top of the standard £325,000 nil rate band and is an allowance for people who pass on a property to their children, grandchildren or other lineal descendants. But while the RNRB can ease an IHT burden, it is only useful to those who can satisfy its conditions.

Aside from having to leave the interest in the qualifying residence to a lineal descendant, it is also important to note that the RNRB is cut back by £1 for every £2 by which an individual’s overall estate exceeds £2 million. Thus, currently there is no RNRB at all if the deceased holds assets of more than £2.2 million – and remember that business and agricultural assets count towards that threshold even if they qualify for 100% tax relief.

However, with some thoughtful tax planning, there are potential opportunities for estates to benefit from the full RNRB.

First things first?

Many couples choose not to make use of the standard nil rate band on first death, on the basis that, if unused, it can be transferred to their surviving spouse or registered civil partner and claimed on second death. However, leaving assets worth £325,000 to someone other than the surviving spouse on the first death can be beneficial if it keeps the survivor’s estate below the £2 million trigger point for reducing the RNRB on second.

“If you’ve left everything to your spouse,” said Nik Hynes, “and this causes their estate to exceed £2 million, it may be worth using the £325,000 nil rate band on the first death to leave assets in a trust, so that they don’t consolidate with the estate of the surviving spouse, but remain accessible to them,” says Nik Hynes.

“It’s also worth noting that in determining the value of a deceased’s estate for the purpose of the £2 million trigger point, it’s not necessary to add back gifts made within seven years of death, as you do when calculating the Inheritance Tax liability on the deceased’s estate. This means that making a gift in excess of the £3,000 annual exemption could produce a substantial IHT saving even if the donor fails to survive for seven years, as recently applied to one of our Manchester-based clients.”

In circumstances where the IHT liability cannot be eliminated, it can be worth giving thought to tax efficiently providing for it through appropriate life assurance held in trust. In addition, it’s important to remember that Wills should be reviewed regularly to ensure that they meet your current needs.”

The tax plan you end up with should be one that is aligned with your objectives in relation to who should benefit on your death and when; and, subject to this, for it all to be done as tax efficiently as possible. In seeking the best result for your family, it’s vital to obtain professional tax advice.

For an informal chat or to set up an appointment, please contact kate@treeaccountancy.co.uk

Tree are a Manchester-based accountancy practice specialising in tax, business growth, auditing, self-assessments, and strategic and corporate finance.  Once you have accumulated your wealth, we work to ensure you keep it

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