IMPORTANT INHERITANCE TAX CHANGES Inheritance Tax (IHT) is payable on death at the rate of 40% of the value of a person’s net estate (after payments of debts, expenses and so on) above the current Nil Rate Band of £325,000. On the death of a surviving spouse or civil partner, where the Nil Rate Band of the first to die was not used and is transferrable to the survivor’s estate, this figure doubles to £650,000. An additional Nil Rate Band, when a residence is passed on death to direct descendants, will be introduced for deaths on or after 6 April 2017. This Residential Nil Rate Band will apply in addition to the existing £325,000 Nil Rate Band and any unused part of the Residential Nil Rate Band will be able to be transferred to a surviving spouse or civil partner (in the same way as for the existing £325,000 Nil Rate Band). The Residential Nil Rate Band will be •
£100,000 in 2017‐18,
£125,000 in 2018‐19,
£150,000 in 2019‐20, and
£175,000 in 2020‐21.
It will then increase in line with Consumer Prices Index from 2021‐22 onwards. It will also be available when a person downsizes or ceases to own a home on or after 8 July 2015 and assets of an equivalent value, up to the value of the Residential Nil Rate Band, are passed on death to direct descendants. However, there will be a tapered withdrawal of the Residential Nil Rate Band for estates with a net value of more than £2 million (at a rate of £1 for every £2 over this threshold). One important thing to note is that the new Residential Nil Rate Band does not apply to deaths until 6 April 2017 onwards and the full £1m benefit will not be applicable until 2021, by which time the proposed changes will have less of a financial impact than envisaged if house prices continue to increase in value in the way they have in recent years. What are the conditions?
The first condition is that the deceased must have had a residence at death or, at least, have had a residence at some point after the new rules were announced on 8 July 2015. The definition of “residence” for the purpose of the new rules is not fully clear. However it is a requirement that the deceased lived in the property at some point. An investment property will therefore not qualify although if it was lived in and later rented out, or vice versa, the property would qualify. Where a person has more than one residence the Executors of their estate can choose which residence the Residential Nil Rate Band should apply to. However, the Residential Nil Rate Band cannot be divided between different residences. Who can benefit from the Residential Nil Rate Band? The residence of the deceased must be inherited by “direct descendants”, who are defined as children, grandchildren and further lineal descendants, including step‐children and adopted children. The definition also extends to the respective spouses and civil partners of lineal descendants, and also widows, widowers and surviving civil partners who have not remarried. Whether the Residential Nil Rate Band will apply where a direct descendant inherits an interest in a trust, rather than inherits outright, depends on the nature of the trust. Trusts for bereaved minors when they reach 18 will qualify, as do trusts where an individual of any age is given a legal right to live in the property. In contrast, a discretionary trust, where no beneficiary is entitled as of right to either income or capital or a right of residence, will not qualify. This means that many Wills that included discretionary trusts should be reviewed. Does the Residential Nil Rate Band apply to all estates? The Residential Nil Rate Band is restricted if the value of the estate exceeds a threshold of £2m. For every £2 that the value of the net estate (before taking into account exemptions and relief from IHT) exceeds the threshold the Residential Nil Rate Band available will taper by £1. For deaths after 6 April 2017, when the Residential Nil Rate Band will be £100,000, where an estate is valued at over £2.2m (or £2.4m where the unused Residential Nil Rate Band has been transferred to a surviving spouse or civil partner) it will taper to nothing. For
deaths after 2020/21, when the Residential Nil Rate Band will be £175,000, these taper limits will have increased to estates over £2.35m in value (or £2.7m where the unused Residential Nil Rate Band can be transferred). For estates valued above the threshold there may be circumstances where it is tax efficient to make lifetime gifts outright or to a trust in order to reduce the value of the estate below the taper threshold. UK Residential Property Held by Foreign Domiciled Persons UK domiciled Individuals are subject to IHT on all their worldwide assets (subject to various reliefs and exemptions). Individuals who are not UK domiciled or deemed domiciled (often referred to as “non‐doms” for IHT purposes) are, until April 2017, only subject to IHT on their UK assets (whereas their foreign assets are excluded from the scope of IHT). From April 2017, all UK residential property held directly or indirectly by foreign domiciled persons will be brought into charge for UK inheritance tax (IHT) purposes. This will be the case even when the property is owned through an indirect structure such as an offshore company, partnership or trust. Restrictions on non‐dom status The Government has also announced another change that will be relevant to non‐doms and IHT: From April 2017, those who have been resident in the UK for more than 15 out of the past 20 tax years will be treated as deemed UK domiciled for all tax purposes and will therefore become liable to IHT on all their worldwide assets (subject to various reliefs and exemptions). Conclusion The new rules for Inheritance Tax will adversely affect many existing Wills and it is important to take advice on your particular circumstances before they come into effect from 6 April 2017 onwards. In particular, anyone in the situations mentioned below should seek advice now: 1. Anyone who has downsized after 8th July 2015 or who has moved into a care home or rented accommodation;
2. Anyone who has made a Will where the estate is to be divided partly between children, grandchildren or other lineal descendants and partly between non‐lineal descendants (e.g. siblings or friends or charities); 3. Anyone who has made a Will that includes a nil‐rate band discretionary trust (this type of Will was popular prior to the introduction of the transferable nil rate band); 4. Anyone who has transferred their residence to their children, grandchildren or other lineal descendants as a gift after 8th July 2015 and has not sold it on the open market; 5. Anyone who has left property to children, grandchildren or other lineal descendants in their Will and made the gift contingent upon the beneficiaries attaining a specific age e.g. 18, 21, 25; 6. Anyone who has made contingent gifts like those mentioned in 5 above to children, grandchildren or other lineal descendants but have also included provisions that substitute non‐lineal descendants if the lineal descendants die before reaching the specified age; 7. Non‐doms who own residential property in the UK in their own name or who own property through an offshore company, partnership or trust. For further advice on these changes or to book a Will review appointment, please contact
Steven Whiting Craig Solicitors, 458 Roundhay Road, Oakwood, Leeds, LS8 2HU. Telephone: 01132 444 081 Mobile: 07467 077 503 Email: email@example.com