The current amount you can leave without inheritance tax (IHT) becoming payable is £325,000.  This is known as the nil rate band (NRB).  Amounts above this are taxed at 40%, subject to some exceptions such as gifts to charities.  Gifts you make during your lifetime that exceed £3,000 in a tax year may also reduce the NRB available to you when you pass away.

Transfers between spouses and civil partners are exempt from IHT and therefore if all of your estate passes to your spouse or civil partner there will be no IHT to pay, even if your estate exceeds the NRB.  When the surviving spouse dies, they effectively have a double NRB to offset against their estate.

In April 2017 the Residence Nil Rate Band (RNRB), came into effect.  In addition to the existing allowance, a further allowance - starting at £100,000 has been introduced.  This will annually increase by £25,000 until 2020/21 when it will reach £175,000 per individual.  This gives individuals a potential allowance of £500,000 and, if you consider the concept of transferring a NRB as above, could give a surviving spouse or civil partner an allowance of up to £1 million.

An estate will be entitled to the residence nil rate band if:

• The individual dies on or after 6 April 2017
• The individual owns an interest in a property that is included in their estate
• The individual’s direct descendants inherit the property, or a share of it
• The estate is valued at less than £2m

The RNRB differs from the existing NRB in that it does not apply to lifetime transfers, i.e. transfers into trusts or gifts given within seven years of death.  So the existing NRB could be used up by gifts made within seven years of death, but an estate would still be able to utilise the RNRB.  The estate may still be entitled to the RNRB if a deceased person disposes of a former home or has downsized to a less valuable home.

In light of these changes, it is essential that you ask your solicitor to review your will to ensure that your estate can benefit from the new RNRB provisions.  This is particularly relevant when you consider that the Office for National Statistics reported in April 2016 that the Government was on track to receive its highest annual intake of IHT in history - a forecasted figure of £4.6 billion (actual figure yet to be released).  Figures from the Office for Budget Responsibility show that the amount of families liable to pay IHT has risen from 15,000 in 2010 to 40,000 in 2016.  This demonstrates how much the RNRB is needed; as the values of estates rise, so does the likelihood of falling within the IHT bracket.  It may be with this in mind that the RNRB figure is set to increase ‘in line with inflation’ after 2020/21.

All this shows that estates have been paying more tax than ever.  With values of homes in Essex up 16% last year (higher than London, at 11%) the values of estates are steadily increasing.  Whether the RNRB will ease the tax pressure, only time will tell.

Any questions regarding the information within this article please call Joanna Millican a specialist in wills, trusts and probate based in our Colchester office on 01206 217360 or email joanna.millican@birkettlong.co.uk.