17th August 2015
One of the headline announcements during the first Budget of an all-Conservative Government since 1996 was that couples can pass up to £1m of their assets, including the main family home, to their children or grandchildren tax-free writes Ian Dyall, head of estate planning at Towry…
The introduction of a ‘family home allowance’, in addition to the existing £325,000 nil rate band (the freeze on which has now been extended to 2021) will begin at an initial £100,000 in the 2017-18 tax year.
As the surviving spouse or civil partner can inherit their deceased partner’s unused nil rate band and their main residence nil rate band this effectively means that inheritance tax allowance for the surviving spouse will rise from the current £650,000 to £850,000 during that tax year, with the main residence nil rate band incrementally rising until the 2020-21 tax year when the full £1m can be utilised.
This is all with the important caveat that the main family residence is passed upon this second death to children or grandchildren.
So how might all of this impact upon your current plans to pass on your home, and indeed your other assets? Moreover, if you have made plans to fund your own retirement through ‘downsizing’ your property to provide more liquid capital, should you now revise these plans in light of the fact that your inheritance tax bill should fall?
Coming to your retirement planning first, the Government has promised that those who do decide to downsize their main property will not lose out, and that other assets will be ring fenced to make up any shortfall between the new downsized property and the eventual £175,000 main residence nil rate band (or £350,000 for couples).
That said, consider this example. Say you live in a modest house worth £200,000, and you have plenty of liquid investable assets set aside. In order to fully utilise the £350,000 upon the death of the second spouse, it may be worth considering ‘upsizing’ a property from existing investments.
You could then have a property worth £350,000 which can be passed on to children or grandchildren in its entirety, not affecting the remaining two nil rate bands of £650,000, which can represent any other assets held by the couple. Despite Government assurances over downsizing, some people will undoubtedly consider keeping their property for longer and, in examples such as these, some may even move into a larger property during retirement, rather than out of it. The HMRC Tax and Information Note¹ on the changes states: ’This measure could marginally increase demand for housing’, so even they must think this is a possibility.
Turning to passing on assets upon death, it is worth remembering that the inheritance tax reforms are not beneficial for everyone. If your total estate is worth £2m or more, while you will keep your £325,000 nil rate band (or £650,000 for couples), the main residence nil rate band will be gradually withdrawn.
The Government has made it very clear in this Budget that the total number of estates which will make a contribution to inheritance tax will continue to rise by the end of this decade. With property prices continuing to make significant gains and the nil rate band frozen until at least 2021, there will be an increasing number of people caught out by having a total estate exceeding the £2m figure.
So is there anything else to consider if you already feel you have your estate planning in place? The answer is most definitely.
These changes may well have a significant impact on the best way to pass on your wealth, and it is important to review the value of your estate, your Will, any life cover arrangements you may have in place, and indeed any use of Trusts that you may have in place as a way of safely distributing your wealth in the way you wish. You should seek regular and ongoing advice to determine how best to look after your assets during retirement and considering how to pass these assets on.