According to a recent report from property experts, Savills, 75% of the UK’s housing wealth is now owned by the over 50s. Small wonder, then, that the yield from Inheritance Tax is rising. What can you do to minimise the impact of IHT on your estate?
It will come as a surprise to very few to learn that the UK’s housing wealth is predominantly owned by older households. International property experts, Savills, believe 75% of the UK’s property equity is held by homeowners over 50. A reflection of historical strong house price growth, their report also reveals that the over 65s own 43% of all equity – worth some £1.6 trillion. More of these older households are in the South West of the UK, where the over 65s own almost half of all homeowner equity.
Death and Inheritance Tax
As you might expect from the above findings, the yield from inheritance tax (IHT) is rising. Indeed, the number of estates affected by IHT increased by nearly 60% in the six years to 2016/17. The most recent government statistics show that the net capital value of estates went up by £17 billion to £79 billion between 2009/10 and 2015/16. Roughly 54% of this increase is attributed to residential property.
IHT is generally payable when a taxable estate is worth more than £325,000. It is usually charged at 40% on the value of the estate above this threshold.
The nil rate band is the most significant relief from Inheritance Tax. This means that a 0% rate applies to the first part of a taxable estate within the £325,000 band. Following the first death of a married couple or civil partner, any unused percentage of the nil rate band that exists from the estate, can be carried forward and added to the nil rate band of the survivor.
An additional relief for homeowners, the ‘residence nil rate band’ (RNRB), is being phased in. RNRB will allow a family home to pass to direct descendants, such as children or grandchildren and include provisions to cover, for example, situations where someone has downsized or sold to raise capital, say for care home fees.
The RNRB for the tax year 2018/19 is £125,000. The band will increase each year up to £175,000 in 2020/21. In effect, this increase means that, by 2020, a couple will be able to pass on total assets worth £1 million. Please note that there is a tapered withdrawal of RNRB for estates worth over £2 million and this limit does not allow agricultural or business reliefs to be taken into account.
Inheritance Tax Planning – a strategic approach
In many regions, homes have risen sharply in value over the past decade and there may be times when even the nil rate band and RNRB do not cover the wealth in an estate on death. Whilst it is not always feasible to focus planning around the family home, looking at IHT as a whole may lead to more strategic tax planning decisions.
Transfers of assets between spouses are exempt from IHT. This applies both to lifetime transfers and transfers made on death.
Many smaller or regular lifetime gifts are also exempt from IHT; larger gifts may become exempt after a period of seven years.
Gifts to charity also have the potential to give an estate access to a lower rate of IHT on some assets.
Unused funds in a private pension can be passed directly to beneficiaries without being included in the chargeable estate.
Make a Will
The only way to ensure that your estate is distributed in line with your wishes when you die is to have a Will. Our Barrister Intermediary, Sharon Rigden can help you prepare a new Will or update an existing Will. Call Sharon on 01772 431233 or email firstname.lastname@example.org. Find out more about our personal and business legal services on our website.
For information of users: This material is published for the information of clients. It provides only an overview of the regulations in force at the date of publication, and no action should be taken without consulting the detailed legislation or seeking professional advice. Therefore no responsibility for loss occasioned by any person acting or refraining from action as a result of the material can be accepted by the authors or the firm.