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2017 Introduction of the IHT Residence Nil Rate Band

2017 Introduction of the IHT Residence Nil Rate Band

Inheritance Tax changes – April 2017

In 2008 the Conservative Party proposed an increase in the married couple’s inheritance tax (IHT) allowance.  Seven years later David Cameron is finally following through with this pledge.  This new uplift will effectively remove 94% of estates from being deemed taxable. 

The current position…

  • Everyone is allowed to own up to £325,000 (the IHT ‘allowance’) before IHT is due at 40% on anything over that £325,000.
  • This is subject to certain IHT reliefs e.g. agricultural relief, business property relief, gifts to beneficiaries who are tax exempt (spouses, civil partners, registered charities and Government parties) etc.
  • Wealth given away in the seven years before a person’s death will impact on the amount of the £325,000 allowance remaining available to the estate.
  • Spouses and Civil Partners are able to transfer their £325,000 allowance to each other so that they have a double allowance of £650,000 available on the combined estate at the date of the second death. 

What are the proposed changes? 

  • Introduce a new, additional allowance of £175,000 per person with respect to a main residence when passed to children or grandchildren. 
  • This will be transferrable so it is likely spouses and civil partners will continue to prefer to leave everything to each other so they can cumulate the two new allowances with the two already available allowances and apply the total available allowance to their combined estate – i.e. £650,000 + £350,000 = £1 million.
  • Tax will again then be due on the second death.

Is the full uplift available from April 2017 onwards?

The answer is no.

The new Allowance will be phased in gradually so that it is worth:

  • £100,000 in 2017‑18
  • £125,000 in 2018‑19
  • £150,000 in 2019‑20 and
  • £175,000 in 2020‑21

And, is this new uplift available on all estates?

The answer is no. 

  • IHT would be taxed at 40% on a single person’s estates over £500,000 or married couple’s estates over £1 million up to £2 million.
  • A new inheritance tax rate of 60% would then apply to estates between £2 million and £2.35 million, after which point the tax charge would again reduce to 40%.
  • Effectively anyone with estates worth more than £2.35 million would not benefit from the proposed changes, and in fact could even be impacted by a raid on their pension pot. 
  • As the uplift is also only available to gifts of property passed down the bloodline, it would also not be available to childless persons, couples unless they were succeeded by later generations.

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