There is never a good time to think about the unthinkable. But as HMRC reveals a 22% increase in Inheritance Tax receipts for 2015/16, a little forward tax planning now could make a big difference when you die.
Factors contributing to the latest increase include rising property prices and the static IHT nil rate band of £325,000. The rate has been set at this level since April 2009 and is expected to stay at this level until April 2021.
New relief may reduce IHT for many
The figures highlight the importance of Inheritance Tax planning to mitigate the impact of tax on death. In cases where the assets include residential property that the deceased lived in at some point, a new relief may help remove or reduce IHT tax.
The ‘additional main residence nil rate band’ will apply to deaths on or after 6 April 2017. The amount of relief is to be phased in over four years, starting at £100,000 in year one, and rising to £175,000 in 2020/21.
For many married couples and civil partners the relief is effectively doubled. Each individual will benefit from a main nil rate band and each will potentially benefit from the additional band.
A significant part of most estates in the £300,000 to £400,000 range will be a main residence. In such cases, the new relief will be effective in removing an Inheritance Tax liability.
Inheritance Tax planning for larger estates
For larger estates, we have learned that shares and securities make up an increasing proportion of the estate. Planning to mitigate IHT for an estate including these assets would often include:
- Claiming the exemption on the transfer of assets to a spouse or civil partner.
- Gifting assets to charity. A charitable gift removes the gift from the value of the estate. It may also reduce the rate of IHT on the remaining chargeable parts of the estate from 40% to 36% (if at least 10% of the net estate is given to charities).
- Business Property Relief. Assets qualifying for this relief will not be subject to IHT. Business property includes shares in unquoted companies and many shares listed on the Alternative Investment Market potentially qualify.
It is useful to point out that, if the net value of the estate is above £2 million, the additional nil rate band is reduced by £1 for every £2 that the net value exceeds that threshold.
An up to date will
The additional nil rate band will be relevant to many individuals but you must take action to ensure it will be available. Arrange for a review of wills written a while ago to ensure current tax advantages are fully utilised.