In the budget last week, the government announced a new relief for Inheritance Tax. As always, the headline and the fine detail are not necessarily the same. This is not an increase of the threshold to £1million.
We don’t have the details yet so much remains uncertain but here’s what we know so far:
- An additional allowance of £175,000 to cover the family home for each spouse / civil partner
- This can be transferred between spouses / civil partners on death
- It covers the family home when left to direct descendants
- If your estate is over £2million the allowance will be tapered down
- It is not lost by downsizing
- It will come into effect in 2020/21
As above the full details of this are not clear yet. Especially how downsizing will impact on the allowance.
What does this mean for you?
The additional allowance is for married couples and civil partners so for everyone else there’s no change –an estate in excess of £325,000 will be subject to an Inheritance Tax liability at 40% on the excess.
For married couples and civil partners with an estate above £650,000 there is potentially a further relief – the details of which are yet to be worked out.
What should you do?
For those who qualify for the allowance it will be tempting to re-write Wills and undo prior tax planning. But, first off, nothing is certain about your Inheritance Tax position until you die. Until then legislation, your circumstances, and those of your family will change from one year to the next. Therefore, you should not rush to undo tax planning that has been put in place in the past.
You should, however, refresh and check it. Especially if you haven’t done so in the past few years. In particular, the new allowance will only apply to property. So if your estate is above £650,000 but your property is below £175,000 you may not get the full allowance – you may need to consider re-arranging your assets to take advantage of the new allowance.
As ever with Inheritance Tax planning, do not let the tail wag the dog. Make sure your needs are taken care of first before shifting assets around or divesting yourself of them. You may need them in the future. Independent financial advice in conjunction with estate planning, before action, is essential.
Many people included Discretionary Trusts in their Wills to mitigate Inheritance Tax prior to 2007. Our advice is to retain the trusts but make sure they still work and this remains the case. These trusts provide flexibility and, importantly, do not have to be used if they are not needed. They also offer planning opportunities for other issues such as care fees and the changing circumstances of your beneficiaries.
Discretionary Trusts continue to have relevance today regardless of the Inheritance Tax position. They should not be removed from Wills as a knee jerk reaction. You should double check them to make sure you understand how they operate and that they continue to work.
For many people nothing has changed. For married couples and civil partners do not rush to undo prior tax planning without advice. But do review things and seek advice for your peace of mind.
Reviewing your Wills and planning regularly is important. Changes to legislation like this offer a good opportunity to review things.
For more information, advice, guidance, or support contact us – it’s what we do!
T: 01227 700 702
Published by Simon Crooks 12 July 2015