The approaching 2017-18 tax year welcomes a new residence allowance for Inheritance Tax purposes. With a little planning the measure stands to substantially reduce your tax liability on death, as Rawlinsons’ Marie Craig explains
The Government is about to introduce a new nil-rate tax band for when a ‘family home’ is passed directly down to a descendant on death. The band will be phased in over four years from 6th April. Descendants are defined as children, stepchildren, foster children, adopted children, grandchildren and great grandchildren.
Currently, the nil-rate band on death for an individual is £325,000, which is expected to remain unchanged until at least 2021. For deaths in the 2017-2018 tax year, the maximum additional residence nil-rate band will be £100,000, rising in stages to £175,000 for 2020-2021. As people get older and downsize to a smaller property, it is not intended that they should be disadvantaged. If the individual dies after 6th April this year and the downsizing occurred after 8th July 2015, the higher value property still applies. The residence nil-rate band is transferable on death between spouses.
For a couple (married or civil partners), this could result in a joint total nil-rate band of £1m, comprising their existing combined £650,000 nil-rate band, plus the additional £350,000 residence nil-rate band. It doesn’t matter who dies first or who owns the property, the residence nil-rate band can be carried forward.
Where an estate has a net value of £2m, the residence nil-rate band will be tapered to zero. In monetary terms this means that for every £2 over the £2m cap, £1 will be deducted from the band available. This means that if the estate has a value of £2.35m (or £2.7m for a married couple), there will be no residence nil-rate band.
Let’s look at an example. If a husband dies in the tax year 2021-22 with an estate valued at £2.2m and leaves the entire estate (including an interest in the main residence) to his wife, the residence nil-rate band on the first death is reduced by £100,000 (£200,000 divided by two). To qualify the residence must have been lived in by the deceased at some stage but it does not have to be their main residence. It applies to one residential property but not a buy-to-let property. A will is the only way to ensure that those you want to benefit on your death actually do so.
If you have dependant relatives (e.g. children under the age of 18 or elderly parents) this is particularly vital. One common misconception is that without a will an estate passes to the surviving spouse. Yet depending on the size of your estate, this may not happen. Making a will is not difficult and with the correct advice can prevent unnecessary Inheritance Tax being paid on death. You need to consider your assets and who you wish to benefit when you die, ensuring that provision has been made for any dependents.
If you have children under the age of 18 you should also consider who should be their guardians. In addition to a will, it is advisable to have a Lasting Power of Attorney. This is a legal document which lets you chose trusted people (attorneys) to make financial and/or health and welfare decisions on your behalf, should you lose mental capacity. The attorneys can be family members, friends or a solicitor or accountant.
It is advisable to have more than one. Having a Lasting Power of Attorney for your business helps to prevent your business from risk and ensures that, should the worst happen and you lose mental capacity, you can rest assured that your business is in safe hands. Should you not have one in place, someone will have to apply to the Court of Protection for a deputy order – a lengthy and expensive process that may prevent the business from functioning in the meantime.
A Lasting Power of Attorney and a will can be revoked at any time if your circumstances change. For advice on making a will and lasting power of attorneys, inheritance tax planning and the new residence allowance, please contact Rawlinsons.
Rawlinsons Chartered Accountants Ruthlyn House, 90 Lincoln Road, Peterborough, PE1 2SP. 01733 568321, www.rawlinsons.co.uk