Inheritance Tax

…Nil Rate Bands and Reliefs

In our previous Inheritance Tax – An Introduction article, we covered the background and administrative aspects of Inheritance Tax. In this article, we will review the available Nil Rate Bands and Reliefs to an individual either on death or on making a lifetime gift.

woman inheritance taxWe will start with a look at the two Nil Rate Bands available as follows:

Nil Rate Band

As detailed in our previous article, each person is entitled to a Nil Rate Band of £325,000 and in October 2007, it became possible for a surviving spouse or civil partner to receive the benefit of the nil rate band unused on the death of their partner. When the second person dies, their estate is allowed to utilise their own nil rate band plus the remaining proportion of the unused nil rate band from the death of the first partner.

This in effect allows for the doubling of the nil rate band for married couples and civil partners and is effective where the second death occurs after 9 October 2007. The changes were widely welcomed when they were announced and removed the need for a large number of trusts which had been put in place to try and achieve a similar outcome.

Main Residence Nil-rate Band (RNRB)

A new IHT main residence nil-rate band (RNRB) came into effect on 6 April 2017. The RNRB will eventually allow for a £175,000 per person transferable allowance for married couples and civil partners when their main residence is passed down to children after their death. This is in addition to the existing £325,000 Nil Rate Band.

The allowance will initially be for £100,000 in 2017-18, increasing to £125,000 in 2018-19, £150,000 in 2019-20 and £175,000 in 2020-21. The allowance will be available to the deceased person’s children or grandchildren. There will be a tapered withdrawal of the additional nil-rate band for estates with a value of more than £2m. This will be at a withdrawal rate of £1 for every £2 over this threshold.

The legislative provisions have been drafted to ensure that an estate will be entitled to the RNRB where an individual downsized to a smaller property on or after 8 July 2015. This is the date the measure was first announced.

Reliefs and exemptions from Inheritance Tax

There are various exemptions and reliefs available for Inheritance Tax purposes and these include the following:

Any gifts made to a UK charity during a donor’s lifetime or in their will are exempt from Inheritance Tax. Political donations to any UK political party that has at least two members elected to the House of Commons or has one elected member but the party received at least 150,000 votes are also eligible for relief. It is also possible to make donations to certain national institutions such as museums, universities and the National Trust and benefit from relief.

Business relief (50% or 100%) can be claimed on qualifying property and buildings, or assets such as unlisted shares or machinery. This is an important relief for business owners and the way in which their business is structured can have a significant effect on the level of relief available.

Agricultural property relief (50% or 100%) can be claimed on farming land, working farmhouses, farm workers’ cottages and barns. There is no agricultural relief for farm equipment but the equipment may qualify for business relief. This relief has the potential for farms to passed down the generations free of Inheritance tax, but with a lot of farms diversifying into other areas, this valuable relief can often be lost. It is important that farmers or landowners consider the effect of any changes they make to their activities carefully in order to assess the potential impact on this valuable relief.

There are special reliefs for woodland timber which allow the value of the timber (but not the land on which it sits) to be exempted from an estate.

There are special rules for national heritage property and famous and important works of art.

This is a commonly used exemption for wealthy taxpayers. Gifts which are made from surplus income which do not result in a fall of the standard of living of the donor are exempt from Inheritance Tax. There is no published limit to this relief; the amount that can be given is only restricted by a taxpayer’s surplus income. This includes monthly or other regular payments to someone, regular gifts for Christmas and birthdays, or wedding/civil partnership anniversaries, regular premiums on a life insurance policy – for you or someone else.

Taxpayers may gift up to £3,000 per year to an individual without a charge to Inheritance Tax. The annual exemption may be carried forward by one year but not thereafter.

Taxpayers may give gifts of up to £250 per recipient per tax year without incurring any Inheritance Tax charge. The exemption does not apply where the gift exceeds £250.

There are also reliefs for wedding gifts. A parent may gift up to £5,000 with no Inheritance Tax liability and grandparents and great-grandparents up to £2,500. There is also a general limit for gifts on marriage of up to £1,000 (per donor).

In our next article on Inheritance Tax, we will cover Potentially Exempt transfers (known as PET’s), some basic tax planning considerations.

In our next article on Inheritance Tax, we will cover Potentially Exempt transfers (known as PET’s), some basic tax planning considerations.

How can Essex Abel help?

We would welcome the opportunity to assist you in arranging a review of your affairs to identify the prospective Inheritance Tax payable on your estate at death. We could then discuss with you the steps that you could take to reduce this liability. Some such steps could be quite straightforward. If the sums involved warrant more extensive planning and you wish to consider this, we can help you here too.

Essex Abel’s team have many years’ experience of advising people in relation to their Inheritance Tax position and offer a FREE consultation to discuss your affairs, if you would like to take advantage of this offer, please contact us.

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. Neither Essex Abel Ltd nor the author accept any responsibility whatsoever for any action taken based upon the information included in this article.