Inheritance tax system changes good news for homeowners
|Author: Craig Bees||Published: 29th October 2019 19:47|
Inheritance tax system changes good news for homeowners
Recent post-Budget analysis may have concentrated on the U-turn over national insurance for the self-employed but another tax change introduced on 6 April 2017 could have far-reaching implications for homeowners.
This tax change means parents and grandparents are able to leave homes worth up to £850,000 to their children and grandchildren without them paying any inheritance tax, a tax-free allowance set to rise to £1m next year.
Originally announced by previous Conservative chancellor George Osborne as part of his long-term plan to reduce the impact of Inheritance Tax (IHT) on ordinary families, here is our guide to inheritance tax.
How does inheritance tax work? Under the old system, inheritance tax was charged at 40% on the portion of the deceased’s estate worth £325,000 or more. This means no inheritance tax is charged on the first £325,000 (per person) of someone’s estate (called the nil-rate band).
Spouses and civil partners could pass all their wealth to each other without tax. However, tax may be payable when wealth is transferred down generations. Nil-rate bands can also be passed between spouses ie the surviving spouse can inherit the entire estate without having to pay inheritance tax. Couples could leave a home worth £650,000 without it attracting inheritance tax (singles £325,000). This remains unchanged. Above the threshold, the charge is 40% of the value of the property.
What has changed?
A new IHT Residence Nil Rate Band (RNRB) was introduced on 6 April 2017, better known as the ‘family home allowance,’ a new allowance of an extra £100,000 per person to use against the value of their home and a further £25,000 will be phased in every year over four years, rising to £175,000 by next year (2020). This will be added to the existing £325,000 nil-rate tax band. So from April 2017 an individual will be able to pass on £425,000 without paying inheritance tax as long as it includes the family home and passes directly to children or grandchildren and not via a discretionary trust. By April 2020 this sum will rise to £500,000.
The changes mean the maximum that can be passed on tax-free is £850,000 for married couples or those in a civil partnership, £425,000 for others.
For singles, this is made up of the existing £325,000, plus the extra £100,000. For couples, when the first one dies their allowance is passed to the survivor, so that £425,000 is doubled to £850,000.
The new RNRB only applies if an individual dies on or after 6 April 2017, if their estate includes a property that they own or part own, and if their direct descendants such as children or grandchildren inherit the property or part of it.
Who will benefit?
Those who are passing the family home to children, grandchildren or surviving spouses. Those who have an estate below £2m.
The RNRB could still be reclaimable in situations where a property has been sold, perhaps because the owner has downsized or moved to a residential care home – provided it was sold after July 2015. This is another area where it is important for homeowners to clarify their situation. The government’s website also includes information on this area: www.gov.uk/topic/personal-tax/inheritance-tax
The RNRB will be transferable between spouses and civil partners on death, just like the existing nil-rate ban. The unused RNRB from the estate of the first to die can be claimed on the second death, raising the total RNRB to £1million. For a couple, this means a £1m family home can be left tax-free to their children.
One likely consequence of the change may be to encourage retired homeowners to hold on to large properties rather than sell up and rent because they know that by next year, with proper planning, their children will be able to inherit £1m of their wealth free of tax.
Who might miss out?
Those with estates worth in excess of £2m will see little or no benefit from the new RNRB, which will be reduced by £1 for every £2 that the deceased’s net estate exceeds £2m. The RNRB could potentially be lost if a property has been placed in a discretionary trust for children or grandchildren. But not all trusts fall foul of the new rules, so it is important to seek legal advice on this point.
Please note only one residential property can qualify for the purposes of the new RNRB. Properties that were never residences, such as buy-to-lets, will not qualify.
The new rules may make it harder for homeowners not domiciled in the UK to avoid paying IHT on UK residential property.
The changes in IHT are so complex and far-reaching that those in any doubt about their position should review their wills as a matter of priority and consider taking appropriate advice, to ensure that they maximise the benefits to their estate.
Badby&Farthingstone Cricket Club Presentation Night
Date: Saturday November 16 (7.30pm start) Venue: Farthingstone Village Hall, Farthingstone.
Details: annual event for club players, members, supporters and guests with food/drink, awards, presentations, speeches etc.
Cost: £6 for fish and chip dinner. Please confirm attendance/number of tickets required on club’s Facebook page at https://www.facebook.com/Badby-Farthingstone-Cricket-Club and pay on the night. Hope to see you there.
Monthly draw: if you missed the October draw why not enter November’s for your chance to win a case of Italian wines (red/whites/mixed) or get one month’s membership to Whittlebury Hall Leisure Club.
How To Enter: every valuation and instruction for sale or rental between now and Wednesday November 27 2019 will be entered into the draw, the winners being notified by e-mail.
If you’re thinking of selling or letting your property and want to win one of these great prizes on offer call (01327) 359164 and speak to our sales or lettings team.
Until next time.
Craig Bees, MD Bartram & Co
E-mail me at email@example.com
Tel: (01327) 359164
Fax: (01327) 359166