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Inheritance tax

Inheritance tax

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Inheritance tax: When is £1m NOT £1m?

From April 2017, a new Inheritance Tax (IHT) nil-rate band is available in addition to an individual’s own nil-rate band. When it was announced in 2015, media headlines suggested that everyone could leave a tax-free legacy of £1m, but the changes will be introduced over the next few years, and don’t apply in every case. 

The new Residence Nil Rate Band (RNRB) will apply if you want to pass your main residence to a child (including an adopted or fostered child) or grandchild. Only direct descendants can benefit, and that doesn’t include nieces and nephews. So not everyone will be able to rely on the RNRB for IHT planning purposes.

The allowance is introduced in stages over four years, with a limit of £100,000 from April 2017, rising to £175,000 per person in 2020. This is in addition to the individual allowance for IHT which remains at £325,000.

How the RNRB applies 

Once fully implemented, each parent will be able to leave £500,000 in assets that include a ‘family home’ component of at least £175,000. It can be passed from one partner to another on death, so when the first partner dies, if their entire allowance goes to their surviving partner, then they would have an allowance of £1 million. Where a property is worth over £2 million, the family home allowance (but not the individual allowance of £325,000) reduces by £1 for every £2 of value above £2 million.

Planning for the future

It makes sense to review the terms of your Will. The RNRB may be lost if the main residence is placed into a Discretionary Will Trust for the benefit of children or grandchildren. The rules surrounding the operation of the RNRB and IHT planning are complex, so you should seek professional advice.

Tax treatment depends on individual circumstances. Tax treatment, rates and allowances are subject to change.

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Don’t forget to use your tax allowances

Each year, UK taxpayers waste billions of pounds by paying tax unnecessarily or failing to claim tax relief that was due to them. With the advent of the 2017–18 tax year, it’s worth spending time thinking about the tax allowances that are available on savings and investments, and aiming to put them to good use during the year.

Personal allowance

This is the amount of income you can earn or receive in a year without paying tax and, for 2017–18, is £11,500.

ISAs

From 6 April 2017, the annual overall ISA allowance rose to £20,000. The tax-efficient ISA range now includes the Lifetime ISA with an annual contribution limit of £4,000 designed to help those under 40 save for a first home, or build up savings to age 60. It offers a 25% bonus from the government on contributions made until age 50. When it comes to saving for a child, the tax-free annual limit for a Junior ISA is £4,128. It’s worth remembering that there is no Capital Gains Tax to pay when you sell shares or units held in an ISA.

Dividends

For the 2017–18 tax year, the first £5,000 you receive in non- ISA dividends is also tax-free. Personal savings For a basic-rate taxpayer, the first £1,000 of savings interest received is tax-free. For higherrate taxpayers, the threshold is £500.

Capital gains tax (CGT) allowance

The allowance has increased, meaning gains under £11,300 are tax-free. Married couples and civil partners who own assets jointly can claim a double allowance of £22,600.

Pensions

The higher your tax rate, the more tax relief you could receive. You can get tax relief on private pension contributions up to 100% of your relevant earnings, and the standard annual allowance on which tax relief is available is £40,000, tapering to £10,000 for the highest earners.

Gifts that are automatically free from Inheritance Tax

Each financial year you can make gifts of up £3,000 (in total, not per recipient). Gifts of £250 to any number of people are exempt. Each parent of a bride or groom can give up to £5,000; grandparents or other relatives can give up to £2,500 and any well-wisher can give £1,000. Gifts to registered charities and political parties are also exempt. ν

Tax treatment depends on individual circumstances. Tax treatment, rates and allowances are subject to change. The value of pensions and the income they produce can fall as well as rise. You may get back less than you invested.

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