It has been reported in the news this week that Treasury receipts from inheritance tax increased by 22% in 2015/16 compared to 2014/15 to a record £4.7 billion. This is mainly due to an increase in house prices in recent years, and means that many more families are paying inheritance tax than has historically been the case.
Inheritance tax is charged at a rate of 40% of the value of any assets over an individual’s available nil rate band. This is set at £325,000 per person, although if the first of a married couple to die leaves everything to the survivor then their nil rate band can be transferred, meaning that currently a maximum of £650,000 can be left on second death without paying any tax.
Although this problem will be partly relieved by the introduction of an additional ‘residence nil rate band’ of £100,000 per person from April 2017 (increasing to £175,000 per person by 2020/21), confusion over how this measure will apply means that expert advice is needed to ensure opportunities to minimise the tax bill are taken. The residence nil rate band will only apply to those leaving their home to their ‘direct descendants’ and details are yet to be finalised on how the rules will operate for those who have downsized or sold their property in order to move into residential care.
It is important to understand how the residence nil rate band will apply to your specific situation (if at all) and how to make the most of all of the available reliefs to ensure that as much of your estate passes to your chosen beneficiaries as possible. For example, no inheritance tax is payable on gifts to charity and depending on the circumstances it may also be possible to claim relief on business or agricultural assets.