Do You Fully Understand the New Inheritance Tax (IHT) Regulations?

The summer Budget brought good news for those with wealth tied up in family homes as Chancellor George Osborne announced the introduction of an additional nil-rate band for a person’s main residence. However, some experts have criticised the announcement for being unnecessarily complicated and causing confusion amongst the public.  

Speaking about the introduction of the new nil-rate band, Ian Dyall of Towry, said: ‘There is a lot of confusion out there and people think it is £1 million each, which it was initially billed as, and some think they need to have a £1 million house to benefit’.

The reality is that the new IHT allowance will be introduced over the next five years so the £1m threshold will actually apply just in time for the next election.  The existing nil-rate band of £325,000 per person or £650,000 per couple, on which 40% IHT is not paid, will remain the same. During the period 2017-2019, the IHT allowance will increase annually until eventually reaching an additional £175,000 per person in 2020/2021. This would then mean that a house worth £1 million could be passed on tax free.

However, that doesn’t mean you no longer have to think about tax planning as there are a number of pitfalls you should be aware of to make sure you’re eligible for the full amount.

You need to be married
Under IHT rules, spouses and civil partners can inherit their other half’s share of an estate tax free so the nil-rate band is not used up. This means the £325,000 allowance of a deceased spouse can transfer to their surviving spouse who will then have an IHT allowance of £650,000 when they die. When the additional allowances are in place, this will mean that the surviving partner will potentially have two £325,000 nil-rate allowances and two £175,000 main residence banks, equalling a £1 million total allowance before any IHT needs to be paid.

Unmarried couples do not have the right to pass on nil-rate bands.

Leave everything to your spouse
In order to benefit from the new regulations, spouses have to make sure that they leave the entire estate to each order in order for the surviving spouse to inherit the deceased spouse’s nil-rate band and main residence band.

Only your children can benefit
If you are married or in a civil partnership but don’t have any children then you will not qualify for the extra allowance. The government’s aim is for homes to be kept within the immediate family, so the main residence band has to be passed down to children or grandchildren to qualify for the allowance.  Nieces and nephews are not classed as immediate family.

Be careful when gifting money to others
By gifting large sums of money to family members, to help children with a house deposit for example, you will erode the amount of allowance you have to play with, meaning that the £1 million threshold may no longer apply to you.

Keep your wealth in your home
The additional band does not mean a total estate of £1m can be passed on as the value only applies to the family home. If you have a large investment portfolio rather than an expensive house, you can’t benefit from the additional allowance.