Upon death, an individual can leave assets up to £325,000 without the application of Inheritance Tax. This is known as the Nil Rate Band. The Nil Rate Band is transferable between spouses or civil partners on death, potentially allowing estates of up to £650,000 to be passed on free of death duties, which are currently applied at the rate of 40%.
Due to increased house prices, even those with relatively modest homes can find their property exceeds the Nil Rate Band. In a measure to counteract this, the Residence Nil Rate Band was introduced on 6 April 2017. This is an addition to the Nil Rate Band, where the home is left to a direct lineal descendent. The current Residence Nil Rate Band is £150,000 and is set to increase to £175,000 from 6 April 2020. Again this is transferable between spouses and civil partners on death.
Where the net estate exceeds £2M the Residence Nil Rate Band is tapered down by £1 for each £2 of excess. For example £100,000 of excess estate would reduce the Residence Nil Rate Band by £50,000 creating a tax liability of £20,000.
It is possible to make gifts right up to the date of death to reduce the value of the estate for the purposes of tapering even if a last minute gift fails for the purpose of Inheritance Tax. An example of this is provided below:
Assumes full Nil Rate Band & Residence Nil Rate Band transferred from spouse
|Without Gift||With Gift|
|Last minute gift||£600,000|
|Nil Rate Band||(£650,000)||(£650,000)|
|Residence Nil Rate Band||(£0)||(£300,000)|
|Net Inherited Estate||£1,820,000||£1,940,000|
There are myriad of Inheritance Tax planning strategies which could be employed to manage or reduce the tax exposure. Schemes such as Discounted Gift Trusts and Loan Trusts can be used to keep down the value of estates whilst providing regular payments to the donor.
For more information please contact your Wealth Manager, or alternatively call us on 01223 720 208.