What the New Inheritance Tax Rules Mean for You

What the New Inheritance Tax Rules Mean for You

The changes to the Inheritance Tax (IHT) law that were announced in the 2015 Budget – where from 2020, homeowners will be able to pass on £500,000 worth of property, tax-free, to direct descendants – is positive news, especially with ever increasing house prices.

Good news

Last year the then-Chancellor George Osborne announced that he would raise the inheritance tax threshold due on property, increasing the allowance from £325,000 per person to £500,000, in the form of a family home allowance, with the increase being phased in from 2017-2020.

This means that married couples and civil partners will be able to pass on property worth up to £1m without their estate paying any IHT at all.

The legislation also provides an inheritance tax credit, so anyone who wants to sell an expensive property now and downsize to a smaller property will still qualify for the new threshold providing the bulk of the estate is left to direct descendants.

The drive behind this part of the legislation is to encourage pensioners in big homes to downsize, freeing up homes for families, as well as giving a nod to rising home values.

Not good news for everybody

While these changes have been welcomed, those who have higher value properties, or other personal assets, will not benefit.

People living in cities and more expensive areas may see their property values climb to well over the IHT threshold within their lifetime. For example: the average London house price is currently £503,431.

By 2020 (so in just 4 years), house prices in London are expected to rise by 15.3%.

And those people who are cash rich, but do not own property, will not be able to take advantage of the changes, with still just £325,000 (or £650,000 as a couple) worth of their estate being tax-free when they die.

Tax planning

There are ways, however, that with careful planning, your estate won’t be hit with a large inheritance tax bill when you die.

One such high profile example of how tax planning can benefit those you leave behind is that of the sixth Duke of Westminster, Major General Gerald Cavendish Grosvenor, who died in August this year.

With a reported £9.35bn fortune, the taxman could potentially have been looking forward to around £4bn in death duties. This is not the case however. While it is not known exactly how much in death duties his son, Earl Hugh Grosvenor – the seventh Duke of Westminster – is liable to pay, the media has speculated that it will be a much lesser amount than £4bn.

This is because the family estate has been placed in a serious of trusts, meaning the young Duke will not be subject to the 40% tax rate. Of course, some inheritance tax will be due on assets held personally by the Duke. But the bulk of the estate may typically be liable only to a periodic charge, paid every ten years and which amount to less than 6%.

While this may seem like tax avoidance – which it isn’t – it appears that the late Duke’s family had suffered from paying huge death duties previously and learnt from their experience.

Taxes totalling around £11m (£200m in today’s money) hit the estate of the third Duke of Westminster upon his death in 1963 and is said to be the largest amount of death duty even paid in the UK.

Getting your finances in order

By getting his finances in order, the sixth Duke of Westminster made sure that his estate wasn’t liable for a hefty IHT bill when he died. Of course, you don’t have to be a Duke or Duchess to have concerns over inheritance tax, it can affect anyone who has – or will have when they die – assets worth £500,000 or more.

According to HMRC statistics, IHT receipts in 2015-16 were £4,673m – 22% higher than in 2014-15. Being concerned about the amount of inheritance taxes your dependants will be liable for upon your death is natural. With careful tax planning, however, you can preserve what you have built up and worked hard for, getting the peace of mind of knowing that your dependants will not have to pay a huge sum of their inheritance to the taxman.