Latest figures from HMRC reveal a 22% increase in inheritance tax (IHT) receipts in the 2015/16 tax year. This is a significant uplift from the average 12% annual increases that have been experienced since 2010. There are several factors which have contributed to the latest increase including rising property prices and the static IHT nil rate band. The nil rate band has remained at £325,000 since April 2009 and is set to remain frozen at this amount until April 2021.
Clearly, the data reveals the importance of IHT planning to mitigate the impact of the tax on death. If the assets on death include residential property which has, at some point, been a residence of the deceased, a new relief may help to remove or reduce an IHT tax liability. The new relief - the 'additional main residence nil rate band' - is being introduced for deaths on or after 6 April 2017. The amount of relief is being phased in over four years; starting at £100,000 in the first year and rising to £175,000 for 2020/21. For many married couples and civil partners the relief is effectively doubled as each individual has a main nil rate band and each will potentially benefit from the additional band.
The HMRC data reveals that, for those with estates in the range £300,000 to £400,000, a significant part of the estate consists of a main residence and thus the relief will prove effective to remove an IHT liability.
For larger estates, the HMRC data shows an increasing proportion of the estate consists of shares and securities. Traditional planning to mitigate IHT for these assets, and widely used by individuals, include:
- Claiming the exemption on the transfer of assets to a spouse or civil partner. This is the most common exemption to be used.
- Gifting assets to charity. A charitable gift removes the gift from the value of the estate and also may reduce the rate of IHT on the remaining chargeable parts of the estate from 40% to 36% if, broadly, at least 10% of the net estate is given to charities
- Business Property Relief. Assets qualifying for this relief will bear no IHT. Business property includes shares in unquoted companies and therefore many shares listed on the Alternative Investment Market potentially qualify for this relief.
It is also relevant to note in respect of larger estates that if the net value of the estate is above £2 million, the additional nil rate band is tapered away by £1 for every £2 that the net value exceeds that amount.
For many individuals, the additional nil rate band will be important but you need to ensure that the relief will be available. If wills have been written some time ago, they may result in the tax advantages not being fully utilised. Please do contact us if you want advice on this matter.