How The New Inheritance Tax Rules Will Affect Your Clients

In the 2015/16 tax year, the Treasury brought in £4.7 billion through Inheritance Tax (IHT), up 22% from the year before.  Massive rises in house prices, especially in London and the South East have been the main driver behind more estates being subject to IHT. This has resulted in more IHT planning and contentious Wills work for the legal profession.

From April 2017, new IHT rules come into effect that may have a profound impact on many of your firm’s clients.  Some will benefit from the changes.  Others, especially high-net-worth individuals and non-domiciled residents (‘non-doms’) may need urgent legal advice to rearrange their affairs.

The current IHT rules

The current nil rate band is £325,000 per person; an estate with a greater value than this will be subject to IHT at a 40% rate.

Under their Will spouses can leave their estates to each other, passing on their nil-rate-band to their surviving husband or wife.  When they die, the beneficiaries of the estate may benefit from a £650,000 IHT-free allowance.

The new residential nil rate band 

The government has introduced a new nil rate band on residential property which is used as a main residence. The tax-free allowance will equate to £100,000 for the 2017/18 tax year, increasing incrementally, until finally totalling £175,000 by 2021. As with the current nil rate band, the residence tax-free allowance can be transferred to the surviving spouse.

To qualify for the residence nil rate band, the property must:

  • be lived in or have been lived in at some point by the deceased
  • be passed onto direct descendants i.e. children and grandchildren including step-children, foster children and natural children who have been adopted

To fully benefit from the new residence nil rate band once all of the increases are in place from 2021, the residential property must be worth at least £350,000.  If the qualifying home is worth less than this amount, the tax-free allowance passed onto direct descendants may be limited.

The residence nil rate band cannot be applied to buy-to-let properties.

If a couple chooses to leave their qualifying residential property to their grandchildren, the inheritance must be an outright gift.  If age-limits are attached to the inheritance, for example, a trust has been created where the beneficiary can only inherit the property after they turn 25 years, the residential nil rate band will not apply.  Therefore, couples may have to strike a delicate balance between saving on inheritance tax and giving grandchildren “too much, too soon”.

By 2021, a husband and wife may be able to leave £1 million tax-free to their direct descendants.  For example, for a married couple with an estate worth £950,000, on the death of the first spouse, the surviving spouse inherits the entire estate and is entitled to claim their spouse’s £325,000 nil rate band and add it to their individual tax-free allowance.  In addition, if the surviving spouse dies after 2021, they will have an additional residence nil rate band attached to the property of £350,000 (comprising of their own and their deceased spouse’s residence nil rate band).  Therefore, when the surviving spouse dies, they can pass on their entire estate free from IHT.

 Estates valued at over £2 million

When George Osborne introduced the residence nil rate band, his critics complained that the rich would benefit more than ordinary people.  To placate those in doubt he issued a caveat on the tax-free allowance: estates that exceed £2 million will see the residence nil rate band decrease by £2 for every £1 more than the £2 million threshold.  Estates valued at over £2.4 million (rising to £2.7 million in 2021) cannot benefit from the residential nil rate band at all.

Closing the corporate envelope for good

Another change coming into force in April will remove the last tax advantage for non-domiciled residents purchasing property through a corporate structure, known as ‘enveloping,’ by making such properties subject to IHT.

This puts non-doms in a difficult position as removing a property from a corporate structure can result in large Capital Gains Tax payments.


Giving with one hand, taking with the other

The new IHT rules will undoubtedly benefit some, especially those with estates valued between £500,000 to £1 million.  But for high-net-worth individuals, it seems their beneficiaries will reap none of the benefits and be subject to high Probate fees.  Fortunately, this socio-economic group has the resources to engage legal and financial experts to assist them in planning their affairs to avoid as much IHT as possible.

How Fraser and Fraser can help you manage inheritance tax matters

Fraser and Fraser are perfectly positioned to assist solicitors engaging in private client matters.  We hold our own Medallion Signature Guarantee stamp for transactions of up to US$1,000,000, and are also experts in share valuation, ensuring clients complete the necessary tax forms when dealing with IHT.

In addition, our team can assist with proving the transferability of a nil rate band allowance by collating the evidence required under the Finance Act 2008.  We achieve this by finding marriage and death certificates where required or alerting you if no relevant records can be discovered.