Inheritance Tax Threshold now £1m – or is it?
On 8 July 2015, Chancellor George Osborne announced a long awaited increase in the inheritance tax nil rate threshold which will come into effect in April 2017. Whilst this is welcome news are the changes as good as they appear? Will they benefit everyone? And is the threshold really going to be £1 million?
The position now
Currently each individual’s estate has an inheritance tax nil rate threshold of £325,000. Assets up to that amount (less the value of any chargeable transfers made in the seven years prior to death) can pass to beneficiaries free of inheritance tax. Any estate over that amount is subject to inheritance tax at 40% unless it passes to an exempt beneficiary such as a spouse, civil partner or charity.
Since 2007 the transferable nil rate threshold has applied between spouses and civil partners. This means that if the first to die did not use their £325,000 nil rate threshold then their unused threshold can be transferred to the estate of the second spouse or civil partner on their death.
Therefore, since 2007 a surviving spouse or civil partner has been able to leave up to £650,000 to their beneficiaries free of inheritance tax. Any estate over that amount not passing to exempt beneficiaries is subject to tax at 40%.
It has been widely believed that the nil rate threshold had actually increased to £650,000 in 2007. In reality, this was a common misinterpretation of the Inheritance Tax law, The threshold remained at £325,000 per estate but the executors of a surviving spouse or civil partner could apply for the transfer of an unused nil rate band increasing the threshold to up to £650,000.
The position from April 2017
From April 2017 a new, additional, nil rate tax threshold will apply to those estates which contain a main residence (or assets representing a main residence - which was sold by the deceased during their lifetime after 8 July 2015) which is being left immediately to direct descendants. Direct descendants will include children, step children, adopted children and foster children etc.
The new additional threshold will start at £100,000 and rise to £125,000 in April 2018, £150,000 in April 2019 and £175,000 in April 2020 following which it will increase in line with the Consumer Prices Index from April 2021 onwards.
It will also be transferable from the estate of one spouse or civil partner to the estate of the other in the same way as the ordinary nil rate threshold.
For estates over £2 million the new additional threshold will be withdrawn at a rate of £1 for every £2 over £2 million.
The ordinary nil rate threshold will remain frozen at £325,000 until April 2021.
What does this mean for you?
Your estate will be entitled to nil rate thresholds totalling £1 million if you meet all of the following requirements:
• you are married or in a civil partnership or are a surviving spouse or civil partner; and
• your spouse or civil partner does not use or has not already used any of their nil rate threshold; and
• you own a main residence or you owned a main residence which was sold after 8 July 2015; and
• you leave your estate to direct descendants; and
• your estate does not exceed £2 million; and
• you die after April 2020 .
However if you do not meet all of these requirements your estate may only be entitled to an ordinary nil rate threshold of £325,000. This amount has been frozen since April 2009 and will remain so until April 2021.
Whilst these changes will mean that a number of estates which would have been subject to inheritance will, in the future, fall below the applicable nil rate threshold they will not provide a solution for everyone. It therefore remains important to consider your individual position and to seek professional advice to understand the position for you and your estate.
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