Understanding the new Inheritance Tax Rules

Many people may have heard about the new inheritance tax allowance that has been introduced in April 2017, which adds an extra tax free amount when you own property.

The new rules unfortunately are rather daunting in practice, and set limitations on when the new allowance can be used.

Understanding the Inheritance Tax Rules facts

Under the current legislation everyone can give away the sum of £325,000 tax free on their death. This is referred to by H M Revenue and Customs as a “Nil Rate Band” and can include anything you own such as property, pensions, bank accounts etc. Anything that you own over this figure is taxed at 40% before then being inherited.

Anything between spouses is tax free, so in a situation where you leave everything to your spouse, this is a tax free gift. Your Nil Rate Band is unused, and can be used when your spouse dies so that they can give away their Nil Rate Band as well as yours. This means that they can give away £650,000 without paying inheritance tax.

From April 2017 there is a new additional tax-free allowance for people who own a home. In this current year this is £100,000 but will increase by the year 2020 to £175,000 per person. This means that if you qualify for this allowance you will be able to give away £500,000 tax free on your death. If transferred to your spouse like above this would mean they can give away £1 million tax free.

A note of caution however; this is a tapered allowance and if you have assets in excess of £2 million pounds you will not receive the full allowance.

How do the new Inheritance Tax Rules work?

In order to obtain the new allowance you must use it on a property that you have lived in at some point in your lifetime, and you must leave it in your Will to “linear descendants”. This includes children, stepchildren, adopted and foster children and grandchildren but DOES NOT include other relatives such as a nieces and nephews.

You can only use the allowance against one property. So, for example, if you die in 2021 and have 2 properties both valued at £150,000, you can only use the allowance against one property, and the remaining £25,000 allowance will be lost, despite you having qualified for the full amount.

If you downsize on or after the 8 July 2015, then the extra allowance can still be used as long as assets of an equal value are passed to linear descendants as mentioned above.

There are specific rules as to how a gift should be phrased in a Will to qualify for the allowance, in particular if leaving property to grandchildren or other linear descendants other than children.

It is clear that the new rules are complex and can make things very difficult when considering how you wish to leave your assets on your death. You may wish to have your wills reviewed by a solicitor who has the knowledge in this area to ensure that you do not miss out on the new allowance. Here at Winston Solicitors we can help guide you through the inheritance tax minefield.

Please contact us on 0113 320 5000

Or email wills@winstonsolicitors.co.uk