Inheritance Tax changes breed discontent
Policies that fail to benefit society equally invariably attract criticism to some degree. This is certainly the case with regards to Inheritance Tax (IHT) on which the spotlight has shone brightly since the Chancellor’s second budget this year. Without meaning to dismiss the current IHT nil rate band being frozen at £325,000 per person until April 2021, the real change lies in the introduction of a tax-free main residence band.
This new relief is to be phased in gradually, starting at £100,000 from April 2017, increasing by £25,000 per year until it reaches £175,000 in 2020, thereafter increasing in line with CPI.
In practice, this means that the maximum that can be passed on tax free in 2017 is £425,000 for singles (£325,000 plus the extra £100,000) and £850,000 for married couples and civil partners (as any unused allowance is transferred to a surviving spouse or civil partner).
By 2020 the tax free amount will rise to £500,000 for singles and £1 million for couples.
Are the changes to Inheritance Tax positive?
Prima facie this is a positive move – at the very least a welcome acknowledgement of rising property prices as well as an effort to reduce the Inheritance Tax burden for a proportion of taxpayers – yet there is a growing air of discontent centred round the fact that there are no plans to make this concession available to those with no children.
Significantly, the tax-free main residence band will only be valid on a family home bequeathed to a direct descendant, classed as a child or grandchild (to include adopted, foster and step children but not nieces and nephews).
A childless couple could therefore be subject to an Inheritance Tax bill that those with children simply do not have to pay. Some class this as unfair – others brand it as discrimination. Whatever stance you take, removing childless couples from the equation undeniably has the potential to provoke significant backlash. After all, remaining childless is a decision that is taken out of some people’s hands.
But is it as clear cut as this? In reality, it is not only childless couples who fail to benefit from this reform. Those who do not have their wealth stored up in the family home will also remain untouched. Likewise, those with homes worth in excess of £2.35 million will not benefit at all as the relief will be tapered for estates worth between £2 million and £2.35 million (after deducting any liabilities but before reliefs and exemptions).
Whilst it may have been ‘fairer’ simply to raise the nil rate band for all estates, this is not the hand that has been dealt. Perhaps a more useful approach would therefore be to focus on the fact that although this policy change could result in reduced Inheritance Tax bills for some, nothing has been implemented to the detriment of anyone – rather it is a case of there being certain sectors of society that are left unaffected.
Whatever your situation, complex Inheritance Tax rules can often be successfully navigated by effective planning. We would be happy to assist with IHT or any other aspect of tax planning. Please do not hesitate to contact Andrew Rand on 01223 461044 or firstname.lastname@example.org.
As featured in Cambridge News Wealth Management Supplement October 2015