Inheritance Tax – Is the Tax Free Limit really now £1Million?
Since 2009, when a person dies; their Estate is valued and if it falls above the Nil Rate Band (NRB) limit of £325,000 then it may be taxable at a rate of 40%. There are exceptions. If you leave your Estate to your spouse – then Spouse exemption takes effect so that no tax will be paid. When your spouse dies – both of your £325,000 limits will be added together so that no tax will be due on the first £650,000 of your combined Estate (most usually left to your children). This is called the Transferable Nil Rate Band (TNRB).
The Conservatives will under the new Budget increase of the Nil Rate Band by creating a “Family Home Allowance” (FHA) due to come into affect in 2017. The concept is designed to reduce the number of Estates which pay Inheritance Tax on the value of the family home.
The FHA is valued at £175,000 per person. Therefore, technically, if you left your entire Estate to your spouse – when the survivor passes away – there would be a total TNRB of £1 Million.
However, the measures are not quite so straight forward. First of all – the FHA is applicable to the family home. Many people sell their properties and move into residential care in the years before they die. The majority of their assets are therefore cash – held in savings accounts and investments. Therefore it remains to be seen whether they will benefit from the new allowance at all.
Secondly, the FHA is tapered for Estates valued at above £2 Million and therefore does not benefit Estates if valued above £2.35Million. This is particularly interesting when you think about the interactions between many couples’ Wills and the fact that most spouses inherit from each other:
If a married couple A and B own a property worth £2.5Million and have savings of £1Million which they hold in equal shares – when A dies – if A leaves everything to B – there will be no tax to be paid because of Spouse Exemption. However, B then has an Estate of £3.5Million which despite the transferable FHA will not benefit under the new rules at all – the Estate on second death will be over the limit!
Third, it has been implied, although not yet confirmed, that the FHA will only come into play if the Estate is being left to children or grandchildren. This is much more limited than the £325,000 NRB which allows a tax-free benefit to any Beneficiary i.e. nieces, nephews and friends.
So the new measure can be seen as beneficial for married couples (or those in a civil partnership) whose combined Estates fall above £650,000 but below £2.35Million and who wish to leave an increased inheritance to their children or grandchildren.
However, due to the complexities of the new measures, it will be worth undertaking in depth Estate Planning when making your Will to ensure that you maximise the allowances available to you.