If you had the chance of undertaking some simple planning to reduce the amount of Inheritance Tax (IHT) payable on your estate by £140,000, would you take action? Well, most people would be mad not to, so what’s it all about?
The fact is that since 2015, when a person dies owning a house that they have previously lived in, they potentially qualify for an extra IHT nil rate band of £175,000. This can save an IHT liability of £70,000 on their death (£175,000 @ 40%). The conditions they need to satisfy to qualify for this relief are as follows:-
- they must have owned a house or residence that they have lived in;
- that house (or the proceeds of the previous sale of that house) must pass to lineal descendants – that is children or grandchildren or spouses of those lineal descendants. This condition will also be satisfied if lineal descendants are entitled to a life interest under a trust of the house in the Will of the deceased; and
- their assets at the date of death must not exceed £2 million. If they do, the residence nil rate band is cut back by £1 for each £2 of excess so, with an asset value of £2.35 million, all of the residence nil rate band is lost.
Where people are married or in a civil legal partnership, the rules become slightly more complicated. If a married person dies leaving all of his/her estate to the survivor, no IHT will arise because of the spouse exemption and so the deceased will not use the residence nil rate band. However, this “unused” allowance will then pass to the survivor meaning on his/her subsequent death, they will have a total residence nil rate band of £350,000 available – which if used by the survivor on his/her death, can give rise to a saving in IHT of £140,000.
In this scenario it is therefore of some importance that
- the surviving spouse does leave, under their Will, at least £325,000 of an interest in a house to lineal descendants (or a life interest trust for them) and not, say, into a discretionary trust and
- if, at all possible, the combined estate on the second death does not exceed £2 million. If it does, the increased residence nil rate band will be cut back. At £2.7 million it will be lost completely.
It is this latter condition that can cause many married couples most difficulty – especially where they already own a valuable house and/or are expecting to inherit wealth from their own parents at some stage in the future.
Often, some reasonably simple planning can help avoid this problem and preserve the whole residence nil rate bands. For example:-
- they could consider making lifetime gifts. These will immediately reduce the value of the estate for the purposes of the residence nil rate band – there is no need to survive 7 years;
- spouses could be encouraged to leave an amount of up to their nil rate band (£350,000) to a discretionary trust on the first death. This will use the deceased’s nil rate band of £325,000 and so no IHT will be payable. This will stop that £325,000 bunching in the estate of the survivor and possibly tipping the value of the survivor’s estate over £2 million. Yet, as a beneficiary, the surviving spouse can still benefit under the trust; and
- elderly relatives (grandparents) should be encouraged by their children to consider by-passing the estates of their children by using trusts. This will avoid the children’s estates unnecessary increasing – yet still give the children access to the funds by being beneficiaries of the trust. Obviously, it is important for the grandparents and parents to have a frank discussion on this first.
On the other hand if a parent or relative has died within the last 2 years leaving assets to a child, that adult child could consider executing a deed of variation to redirect some of that inheritance into a trust under which he/she can still benefit.
So, simple planning can often save up to £140,000 in IHT. This is one of the many planning options will be explored at the Panoramic Wealth Inheritance Tax Planning Event we are holding.
Thursday 9th November 2023
Hotel du Vin, Calverley Road, Tunbridge Wells, TN1 2LY.
We will be running two different slots, one will be aimed at private clients be that individuals, couples and families. Timings for this are as follows:
10.00 Registration and coffee
10.30 Session 16.00 Technical session
11:45 Questions and refreshments
Later the same day we are also holding an in-depth technical session for professionals:
15.30 Registration and refreshments
16.00 Technical session
18.00 Drinks, nibbles and networking
To register, please email us on firstname.lastname@example.org, phone us on 01892 559555