Advice on planning for inheritance tax ahead of new review

Assess your property's exposure to inheritance tax ahead of the government review.
Assess your property's exposure to inheritance tax ahead of the government review.
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by Robert Peel, private clients senior manager, Garbutt & Elliott,

The legislation relating to Inheritance Tax is complex. So it is encouraging to hear that the Chancellor of the Exchequer has written to the Office of Tax Simplification to ask them to look at how the system can be improved to make it easier to submit returns and pay tax.

The Chancellor has also asked the OTS to consider how the system is used for Estate planning.

No details have yet been formally agreed about what areas are to be considered but it looks as if the review will consider many of the current reliefs and exemptions. One relief in particular has faced criticism and should, in our view, be considered for review and simplification.

A few years ago the then Chancellor of the Exchequer George Osborne announced plans to introduce a £1m nil rate band.

However, rather than simply increasing the nil rate band to £500,000 for each individual he decided to introduce a new Residential Nil Rate Band and freeze the amount of the basic nil rate band of £325,000 until 2020/21.

The rules for this Residential Nil Rate Band are complex and discriminate against couples without children and couples who rent rather than own their own home.

The relief applies to deaths after April 5, 2017 and started off at £100,000. After April 5 2018 it has risen to £125,000 and will increase at a rate of £25,000 a year until the maximum relief of £175,000 is achieved. As with the main nil rate band any unused relief of one spouse can be claimed by the surviving spouse.

In order to obtain it you must leave your property to direct descendants. This includes children and grandchildren, step children and adopted children and their spouses. Properties left via a discretionary trust will not qualify for this relief.

There are also complex rules where a property is sold or you downsize before death to ensure that you do not lose the relief. It is also restricted to Estates valued at less than £2m. If you have more than one property, such as a holiday home, your executors can elect which property can qualify for relief.

When you add in the anti-avoidance legislation relating to gifts of property with a reservation of benefit and the Pre-owned Assets Tax legislation, the statutory framework for IHT on property is a minefield.

We hope that the government will reduce the complexity. However, any simplification usually results in reliefs and exemptions being withdrawn or restricted so take stock to see if there is anything you can do to minimise your exposure to IHT. With the Residential Nil Rate Band we suggest that you consider the following:

*Review your wills to see if these need updating. If your Will includes a nil rate band discretionary trust and it is possible that your home may be needed to fund this then think about changing this to leave the property direct to children or grandchildren.

*Is your total estate over £2m and the relief likely to be restricted? If so consider lifetime gifts to reduce the value of your estate. If you give away assets shortly before you die then it is possible to reduce the value of your estate to below £2m and qualify for the relief even though lifetime gifts made within seven years of death are accounted for in determining the amount of tax payable.

*The maximum relief for a married couple is going to be £350,000 but this will only be obtained if the house is valued at this amount or more and you are married. If you are not married and leave your house to your partner you will not be entitled to any relief.