April 6, 2017 sees the introduction of an inheritance tax reform that will reduce the amount of tax paid by most estates. Announced in the 2015 summer budget, it effectively increases the inheritance tax threshold to a potential £1 million for a couple. The increase will happen gradually over four years and only applies to property – with a number of limitations. So will your estate benefit from a £1 million nil rate band?
The Residential Nil Rate Band (RNRB)
The inheritance tax rate is fixed at 40%, with a tax-free threshold (the ‘nil rate band’) of £325,000. When this allowance is not used, or only partly used, you can transfer the balance to your spouse or civil partner. So the combined threshold can be as high as £650,000.
This allowance remains in place and is frozen until the end of the 2020/2021 tax year. However, estates will now benefit from an additional allowance, the new Residential Nil Rate Band.
The final ‘family home allowance’ will be £175,000, but it will be introduced gradually from April 2017:
■ £100,000 in 2017/18
■ £125,000 in 2018/19
■ £150,000 in 2019/20
■ £175,000 in 2020/21
From 2021 it will increase in line with the consumer price index.
You will be able to transfer the allowance to a spouse/civil partner in line with existing principles. This makes a total potential threshold for a couple of £1 million by 2020.
Limitations on the allowance
There are, however, limitations which may affect what allowance your heirs receive.
First of all, it only applies to property which is inherited by direct descendants, so children (including adopted and stepchildren) and grandchildren. You need to have lived in the property at some stage, so investment property is not eligible and only one property will qualify for the allowance.
Since it only applies to property, assets besides the family home do not receive any extra allowance.
Secondly, a limit is imposed so that higher valued estates do not benefit. Where an estate is worth over £2 million the residential nil rate band is tapered, £1 for every £2, so that estates valued at over £2.2 million do not receive this allowance at all (they still get the standard £325,000).
Note that this £2.2 million value applies to your whole, worldwide estate, not just to property. So this includes your savings and investments, trusts, pay outs from life insurance policies, pension lump sums received on the death of a spouse/partner, cars, furniture and personal belongings such as jewellery. It also includes applicable gifts given away over the last seven years. Debts and liabilities are deducted from the total.
Since the residential nil rate band is only available where property is passed directly to children and grandchildren, this will not apply to many trusts. For example, discretionary trusts will be excluded since the assets are technically owned by the trust, not by your descendants.
Some types of trusts do qualify, such as interest in possession and immediate post death interest trusts, because in this case the property is deemed to pass directly to the beneficiaries.
So if you own property in a trust, if you have not already done so, you need to seek advice as soon as possible to establish what you need to do to protect your family from paying unnecessary tax.
Expatriates and the new allowance
If you are UK domiciled, you are liable for inheritance tax on your worldwide assets – liability does not depend on residence. Domicile law is complex; you can live in Portugal for many years and remain a UK domicile.
You can claim the new additional family home allowance on a property here in Portugal, provided it is your main home. Local stamp duty may still apply.
The UK’s Office for Budget Responsibility still expects the government to take £1.8 billion more in inheritance tax receipts over the next five years than was forecast last November. Rising house prices and booming stockmarkets mean asset prices are rising, pushing more families further into the inheritance tax net. It would also mean that more estates pass the £2.2 million limit for the property allowance, which could see them lose the £175,000 allowance. Inheritance tax on £175,000 is £70,000, so this could really affect your heirs.
Seek advice sooner rather than later on how to protect your family and heirs from inheritance tax. It gets more complex for expatriates; you need specialist cross-border estate planning advice to establish where you are domiciled and the most effective solutions for you. It is important to understand how the UK tax interacts with Portuguese stamp duty and what steps you can take to avoid or mitigate these taxes for your heirs.
Tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; an individual is advised to seek personalised advice.
By Dan Henderson
|| [email protected]
Dan Henderson, Partner of Blevins Franks, is a highly experienced financial adviser, specialising in retirement, investment and succession planning. He holds the Diploma for Financial Advisers and advanced CII qualifications in pensions and investment planning.