Inheritance Tax
Inheritance tax is set to become an increasing concern
Britons are set to receive a property windfall over the next 15 years, as a number of the "baby-boomer" generation will leave their home in their wills to children and other relatives in some cases.
According to a report by Halifax Financial Services, the public could inherit £360 billion worth of property and the group estimates that housing would be 60 per cent of all assets bequeathed, up from 49 per cent in 2002-03.
This is down to an ever increasing number of families living in their own home, with the report stating 78 per cent of "baby-boomers", those born from after the Second World War until the mid 1960s, now own a property and even 70 per cent of families of all ages are homeowners.
The report also predicts that the total value of housing assets passed on will more than double from £14 billion in 2002-2003 to £32 billion by 2019-2020.
Although this increase in property will be beneficial to the people who receive them, the housing assets figures coupled with house price growth means that in the next 15 years a much higher number of properties are set to be above the inheritance tax threshold.
At the moment, inheritance tax applies to any estates worth more than £312,000 and the excess is taxed at 40 per cent. As well as the house this includes items such as cars, bank accounts, businesses owned, jewellery and collectibles.
Recent studies have recorded a rise in the number of people affected by inheritance tax and predicted further increases in the future. A recent report by Scottish Widows revealed that around one in three estates are liable for the tax, with the average household wealth at £258,000.
It also said 2.8 million people in the UK are now liable for inheritance tax through the value of their home alone.
Recently, analysts from Grant Thornton and Lombard Street Research predicted that the number of people liable for inheritance tax would rise by 70 per cent in seven years, from two million in 2002 to 3.5 million in 2009.
Ian Johnson, head of private client services at Grant Thornton, commented: "While it used to be a tax on the very rich, our research has shown it is a growing problem for millions of people with modest estates."
A major factor for this is that house prices are expected to continue increasing at a faster rate than the rise in the inheritance tax threshold.
A separate study from Halifax calculated that house prices increased by 164 per cent between 1995 and 2005, whereas the inheritance tax threshold rose by only 79 per cent in the same period.
The threshold was set to go up to £325,000 for 2009/10 but it will have to increase at more regular intervals to reduce the deficit. Halifax estimates that if the threshold had risen in line with house prices over the past 10 years, then this year's threshold would currently be £430,000.
Inheritance Tax (IHT) Nil-Rate Band
Legislation was introduced in Finance Bill 2008 to allow for the transfer of any unused IHT nil-rate band on a person’s death on or after 9 October 2007 to the estate of their surviving spouse or civil partner.
This will apply where the IHT nil-rate band of the first deceased spouse or civil partner was not fully used in calculating the IHT liability of their estate.
When the surviving spouse or civil partner dies, the unused amount may be added to their own nil-rate band.
The amount of the nil-rate band potentially available for transfer will be based on the proportion of the nil-rate band that was unused when the first spouse or civil partner died.
For example, if on the first death the chargeable estate is £150,000 and the nil-rate band is £300,000, then 50 per cent of the original nil-rate band would be unused.
If the nil-rate band when the surviving spouse dies is £350,000, then that would be increased by 50 per cent to £525,000.
If none of the original nil-rate band was used – because the entire estate was left to a surviving spouse – then if the nil-rate band when the surviving spouse dies is £450,000 say, that would be increased by 100 per cent to £900,000.
The amount of additional nil-rate band that can be accumulated by any one surviving spouse or civil partner will be limited to the value of the nil-rate band in force at the time of their death, so it cannot be enhanced because they had more than one deceased spouse or civil partner.
Personal representatives will not have to claim for unused nil-rate band to be transferred at the time of the first death, any claim has to be made by the personal representatives of the estate of the second spouse or civil partner to die.
For those who were planning to incorporate nil rate band planning in their wills on first death anyway, this change will deliver no benefit. A number of clients have questioned whether Nil Rate Band Trust planning is still needed in light of the above change of rules, however:
- It should be remembered that, just as this change to the allowance has been introduced, it could also be taken away by future government.
- The benficiaries of a typical Nil Rate band Trust arrangement are normally the children, so this makes certain that who you want to inherit your estate, actually does. This applies even if the widowed spouse re-marries.
- A typical Nil Rate Band Trust also incorporates IOU discretion, allowing interest to be added between the first and second deaths which has the effect of increasing the tax-exempt allowances.
Draft legislation and guidance for the transfer of the nil-rate band have been published and are available on the HM Revenue & Customs website here:
http://www.hmrc.gov.uk/pbr2007/it-nil-rate-band.pdf
The Chancellor also said that: “And in future years we will take both house prices and inflation into account when setting inheritance tax thresholds.” This is good news, although it begs the question as to what will happen if house prices fall!
In addition, the IHT provisions for alternatively secured pensions (ASP) will be changed.
Currently, a charge arises on left-over ASP funds once a relevant dependant’s pension benefits cease and the rates of tax are those applying at the date of that event rather than as at the date of death of the scheme member.
This rule will be modified so that, if the IHT nil-rate band was not fully used when the original ‘owner’ of the ASP died, the same proportion that was unused will be applied to the amount of the nil–rate band in force at the date of the later event and be available against the ASP.
Therefore, advisers now find many more people asking for their advice on how to reduce the wealth of their estate. There are ways to do it although with some of them there are risks involved.
One option people should definitely consider is becoming separate tenants of a house so that when one person dies the other does not automatically inherit the housing wealth left by the deceased person.
Also, in the will a person does not have to leave a specific amount, instead stating they want to leave an amount equivalent to the nil-rate band of the tax operating in the year of their death, however it is worth getting an expert to draft the wording of this.
Another is giving offspring various gifts, up to £3,000 a year, that are free from tax and higher tax-free amounts can be exchanged as long as the person giving the asset away survives for another seven years. Small gifts of up to £250 per recipient are exempt, as are monetary gifts made out of an individual's regular income without affecting the standard of living of the donor. - This can be a useful strategy in the correct circumstances.
Other ways include equity release as well as investing in shares on the Alternative Investment Market (AIM), which are smaller, fast growing companies on the second tier of the London stock exchange. (This obviously carries a risk, but the investment is clear of any IHT after just 2 years)
Establishing a trust needs specialist advice. (Please see our Trust section)
However, living for a long period of time after releasing equity could be harmful as the interest on equity release loans could raise the net value of the estate more than by not releasing equity, even with rising property values. Also, a large fall in share prices even on the AIM will render the investment pointless.
Therefore, detailed planning is required by consumers and advisers before decisions are made on how to deal with an estate above the inheritance tax threshold.
Surrey Financial Advice can help here. We have a specialist Estate Planning Adviser who can, if required, call on the resources of our separate Will writing and Legal department to obtain for you the correct type and form of arrangements to suit your individual circumstances.
Remember, with Surrey Financial Advice, any initial consultation is free of charge (apart from a cup of coffee, perhaps) and you are under no obligation to proceed. [Contact us]
