Inheritance tax has always been one of the most controversial taxes around. Depending on your point of view it can be; an essential means of making sure that a private individual’s wealth is shared with society as a whole; a pragmatic approach to filling government coffers; a ghoulish tax applied at a difficult time.
Whatever your point of view on inheritance tax, there are two indisputable facts. One is that it is a reality and none of the main parties has recently shown any inclination to abolish it completely. The other is that house prices and house-price inflation in the UK means that anyone who owns a home needs to take inheritance planning very seriously if they want to leave as much as possible to the people they love, rather than to HMRC.
A brief guide to IHT and the new “Resident’s Nil Rate Band”
Each individual in the UK gets an IHT nil-rate band of £325K. Starting April 2017, home owners can receive an additional “Resident’s Nil Rate Band”, which is currently set at £100K and is planned to increase to £175K between now and April 2020. In simple terms, this allows them to pass on more of the equity in their home to their lineal descendants (or the legally-recognized partners thereof) without paying IHT on it. As with the standard nil-rate band, this can be transferred to a spouse or civil partner upon the death of the first person in a legally-recognized relationship. While this does give home owners some degree of respite for the foreseeable future and the fact that the current government has pledged to increase the RNRB in line with the consumer price index does at least show recognition of the fact that house prices do increase over time, in a densely-populated country such as the UK, it is entirely possible that house-price inflation will regularly outstrip the CPI. It’s also worth noting that this RNRB only applies when leaving property or the proceeds thereof to close relatives, those wishing to leave their estate to unrelated parties will be left with the standard IHT nil-rate band. Likewise, those who have significant estates composed of assets other than property will gain nothing from this change.
So what does this all mean in practice?
Boiled down to basics, all this change means is that the government has given some individuals an increased nil-rate IHT allowance, applied in certain circumstances. While it will doubtless be a welcome change to many people, it is hardly a ground-breaking one, nor is it likely to negate the need for an overall IHT strategy. Estate planning, like most aspects of financial management, generally comes down to balancing current and foreseeable needs with future goals. For those in the later period of their lives, current and foreseeable needs is increasingly likely to include making provision for assistance or even care, either in our own homes or in a residential facility. Future goals may include items on an individual’s “bucket list” or may simply be the desire to leave a legacy to people and/or causes the individual holds dear, rather than simply handing over funds to HMRC. Striking this balance may involve blending a number of approaches rather than just relying on the new RNRB or gifting as much as possible during a person’s lifetime. For example, those who are currently approaching retirement may wish to look at their pension arrangements in the light of the fact that pensions pots used for income drawdown can now be passed to any chosen nominee without IHT being charged. Those who are investing outside of pension may wish to pay particular attention to investments which qualify for business property relief as these can be very advantageous from the point of view of estate planning.
Investments that are eligible for business property tax relief are often high risk and / or illiquid and may be difficult to sell.
The value of investments and pensions and the income they produce can fall as well as rise. You may get back less than you invested.
Tax treatment varies according to individual circumstances and is subject to change.
Estate and Tax planning is not regulated by the Financial Conduct Authority.