Rosamond McDowell of Payne Hicks Beach solicitors looks at key changes to inheritance tax policy, which apply from April this year
“…to those who have, more will be given; and from those who have nothing, even what they have will be taken away” (Mark 4 verse 25)
On 5 January 2017, the Institute of Fiscal Studies issued a press release entitled “Rising inheritances will deliver benefit for those already well off”. Apparently, over the past decade or so, largely due to higher homeownership and rising house prices, the rich have become richer, and the poor have become (relatively) poorer, while both low and high income households in the future are more likely than earlier generations to receive an inheritance.
What this highlights is that, in general, inheritance is becoming more important as a factor in determining the financial future of Britons. Inevitably, however, with inheritances becoming more significant, death duties will follow suit.
For much of the 20th century, the taxing regime on inherited wealth was known as Estate Duty, and applied on a progressive basis, peaking in 1969, with a marginal rate of 85% on amounts over £750,000. Estate Duty was replaced by Capital Transfer Tax in 1975, which was in turn replaced by Inheritance Tax (IHT) in 1986.
The parameters of IHT are as follows:
- Estates below a certain limit (“excepted estates”) bear tax at nil rate. This so-called nil rate band (“NRB”) has risen gradually from £70,000 in 1988, but has been fixed at £325,000 since April 2009.
- Above the NRB, IHT applies at 40%, although certain property is excluded from the remit of IHT (“excluded property”).
- Property is excluded from IHT if, broadly, it consists of:
(i) non-UK situs assets owned by a non-UK domiciled person, or
(ii) non-UK situs assets held in a trust created by a non-UK domiciled person.
- Generous reliefs (at up to 100%) are available in relation to qualifying business property and the agricultural value of agricultural property.
- Exemption from IHT at 100% has applied to property transferred to a spouse or a UK charity.
According to National Statistics, net IHT receipts have risen from £2.396bn in 2009-10 to £4.673bn in 2015-16, by contrast to a take of under £1bn annually in the early 1980s, with residential property values being particularly significant in this movement. Perhaps as a reflection of the rising importance of IHT in Britain’s national tax take, two important changes will apply from April 2017.
- The residential nil rate band (“RNRB”)
When the Conservative party took power in the coalition government in 2010, they had long proclaimed that the NRB should rise to £1m. Once in power, this pledge was watered down to the RNRB. Essentially, if the rule applies, from April 2017, the NRB will be increased by £100,000 to £175,000 by 2020, so that the NRB totals £500,000, or £1m for a married couple.
The circumstances in which the RNRB applies are closely proscribed, in that: it applies only to married couples, who leave an interest in residential property to direct lineal descendants. It does not apply to lifetime gifts, and it tapers away for estates in excess of £2m.
For couples who fulfil the above criteria, there could be a saving in IHT of up to £140,000. However, it is fair to say that the value of much residential property around London and the Home Counties will nudge the value of many estates above the relevant threshold. Good IHT planning may therefore include reducing the value of estates by means of lifetime gifts (taking care not to trigger the IHT lifetime charge at 20%, or reserve a benefit in such gifts), to bring them within the relevant parameters.
- Moving the excluded property goalposts
As part of general reforms to the taxation of non-domiciled persons, inroads are also being made to the excluded property regime. From April 2017, IHT will apply in respect of all UK residential property, even if it is held within an offshore company (the “envelope”), whose shares have historically been classed as non-UK situs, and were therefore excluded from IHT in the hands of non-domiciled persons, or settlements created by non-domiciliaries. The change will bring many offshore structures within the ambit of IHT in the UK, with concomitant planning and reporting.
Both the above measures represent significant changes to inheritance tax policy in 2017.
Rosamond McDowell is a private client partner of Payne Hicks Beach solicitors specialising in estate and tax planning.
Following recent issues with HMRC’s personal tax computation software, Brian Palmer of the AAT questions whether the government’s implementation timeframe for Making Tax Digital is realistic
The first phase of a process to restrict the amount of tax relief for residential landlords to the basic rate of tax will enter into force on April 6
Richard Le Tocq, head of Locate Guernsey, discusses the chancellor’s approach to high net worth individuals, and why relocation is increasingly attractive to HNWIs
The firm says that the U-turn 'does not alter the need for a fundamental review of the way we tax work' and that the current tax system is in need of reform