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Inheritance Tax – Good News But Not Quite Yet

On the 8th of July the chancellor announced the much heralded reduction in inheritance tax with these words:

‘The wish to pass something on to your children is about the most basic, human and natural aspiration there is. Inheritance tax was designed to be paid by the very rich.  Yet today there are more families pulled into the inheritance tax net than ever before – and the number is set to double over the next five years. It’s not fair and we will act…..’

Under current rules, no inheritance tax is paid on personal estates valued below £325,000 (the nil rate band or NRB), which will be frozen until 2021.  The government’s new measure is a ‘family home allowance’ which will be added to the basic NRB, starting at £100k in April 2017, increasing to £175k in 2020 (giving a total individual allowance of £500,000).  A married couple can then combine their allowances, to pass on their home worth £1 million, but that is 5 years from now.

But for some there’s little or no good news.  For those who are not home owners there will be no additional ‘family home allowance’.  Unmarried couples (and those not in civil partnerships) are still not able to combine their new ‘family home allowance’ NRB’s.  Furthermore, for those whose joint residential assets exceed £2 million there will be a tapering down of their main residence at the rate of £1 of NRB for every £2 of their main property.  Estates of over £2.7 million will be unaffected by these announcements.

So couples leaving a will, who die in 5 years from now with estates of up to £2 million pounds, can pass on the the full benefits of the chancellor’s tax reductions to their beneficiaries.   But in the meantime, and especially if property values grow at the same rate over the next five years as they have recently, there is still a need to engage in active estate planning, creatively using wills and trusts to minimise tax exposure.

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