Estate Planning: What Does the Recent Summer Budget Mean For You?

21 July 2015

Author: Fiona Wallace
Practice Area: Private Client

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Inheritance tax and the nil rate band

There has been much discussion during the last few weeks about the changes to inheritance tax announced in the Chancellor’s Summer Budget, with media conjecture in the lead up to budget day that the nil rate band threshold was to rise to £1 million. However in order to fully understand the proposed changes, one must look at the proposed policy in a little more detail.

The nil rate band allowance (in general terms, the threshold beneath which an estate will not be liable to inheritance tax) has been frozen at £325,000 since April 2009. This is set to continue until April 2021.

However, in addition to the existing nil rate band, each individual is to receive an additional “main residence nil rate band” from April 2017. This additional nil rate band will attach only to the main residence of the person who has died, and will only be applicable where the individual has left the property to “direct descendants”.

The main residence nil rate band will start at £100,000 for the tax year 17/18, rising by £25,000 each year until it reaches £175,000 in the tax year 20/21. It is then to rise annually in line with CPI.

The estates of those individuals who may have sold their main residence or downsized in the years before their death (on or after 8 July 2015) will still be able to claim this additional nil rate band if there are still assets of an equivalent value within the estate, up to the value of the additional nil rate band. However there is uncertainty as to how this will work in practice, and the measure is the subject of a consultation to be published in September 2015.

Of course, where assets are passed on death to a surviving spouse (for the purposes of this article, the term “spouse” should be read so as to include civil partners), there is no inheritance tax to pay, even though the value of the estate may exceed the nil rate band. Since 2007 it has been possible for any unused portion of a deceased person’s nil rate band to be transferred to the estate of the surviving spouse following his or death. At present this enables the estate of the surviving spouse to benefit from a nil rate band of up to £650,000. Once the main residence nil rate band is introduced, it will be possible to transfer the additional allowance. It follows then that once the 20/21 tax year is reached, married couples and civil partners will potentially enjoy a nil rate band of up to £1 million.

It should be remembered, however, that some or all of an individual’s nil rate band allowance may have been used up if he or she has made certain lifetime transfers in the seven years preceding his or her death, or if he or she has left their estate to someone other than a surviving spouse. Only the unused portion of the nil rate band can be transferred for use in the estate of a surviving spouse.

It is also important to highlight that the nil rate band can only be transferred to the estate of a surviving spouse or civil partner. Unmarried couples and cohabitants do not currently benefit from this measure.

Inheritance tax and non-domiciles

The tax status of so-called “non-doms” has also been heavily discussed in recent months. This has culminated in an announcement in the Summer Budget that all UK residential property owned by non-domiciles (regardless of their residence status for tax purposes) will be subject to inheritance tax in the UK, whereas previously this was not the case. Legislation is to be introduced to bring these changes into effect by April 2017, and a more detailed consultation is to follow later this year.

Deeds of variation

Following the Annual Budget earlier this year, I reported on the possible demise of the use of Deeds of Variation for tax purposes. Following the Summer Budget, a call for evidence has been issued by HMRC, seeking interested parties’ views about the use and effect of the documents in order to gain a better understanding of them, specifically in relation to the extent to which tax advantages have an effect on the decision to enter into such a deed. The consultation is open until October 2015, following which the results will be reported. There is no doubt that the report will be awaited with interest by private client practitioners.

Our Private Client team will continue to monitor and report on these interesting developments in estate planning. If wish to discuss anything raised in this articles, or if you have any questions about estate planning generally, please contact Fiona Wallace or Neil Bleakley.

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