Famously called the only voluntary tax, inheritance tax is a concern for many individuals and couples, even though to this point, the number of people actually paying inheritance tax is relative small. Total government receipts from inheritance tax in 2015/2016 were £4.67bn, whereas income tax and VAT bought in £168bn and £115bn respectively.
However, the increase in house prices over the last 10 years is significantly affecting things. The FT reports that the number of UK families paying inheritance tax is at a 35 year high with 3 times as many families paying inheritance tax in 2016, compared with 2010.
Projections now show that 8% of all estates will pay inheritance tax in 2016/2017.
However, from 2017, a new relief is available, called the main residence nil rate band which can reduce or avoid inheritance tax when a family home is left on death. The full value of the relief will not kick in until 2020, at which point it will be worth £175,000 per individual.
The Current Situation
Individuals currently have a nil rate band of £325,000 per person which is exempt from inheritance tax. Where upon the first death, the assets are past wholly to a spouse or civil partner, the nil rate band is transferred and can be used upon the second death. The same for the main residence nil rate band.
Taking these together, from 2020 it is feasibly possible that couples can jointly pass a home worth up to £1m tax free to their family without paying inheritance tax. The Office for Budget Responsibility estimates that at the point the relief is fully available, the number of deaths subject to inheritance tax will fall back to 5.4%.
Even taking this into account, there will be many families facing the thought of potentially paying inheritance tax in the future, and so are looking for options to mitigate this.
At a Closer Glance
Due to the complexity of the tax itself, professional advice is normally a must. The tax advice normally goes hand in hand with a redraft of your Will to ensure your affairs are as optimised as they can be. In addition, planning often includes:
- Gifts of assets or cash over many years
- Investments in AIM listed companies
- The use of business property relief or agricultural property relief
- Setting up structures to slowly deal with the transfer of assets to the next generation
- Gift and lease back of the main home for those able to do so
The key to inheritance tax planning is to consider it sooner rather than later. When redrafting a Will is an obvious time and it is never too early, but particularly for those aged 50 and over a review is advised.
For more information on Wisteria’s tax planning services, please contact us on 020 8429 9245.