Inheritance Tax Planning

With increasing property prices, more families will be brought into the scope of inheritance tax.  With effect from 6 April 2017, each individual now has a “residence nil rate band” in addition to the normal nil rate band (currently £325,000).  The residence allowance is set at £100,000 for the 2017/18 year, and is set to rise by £25,000 each year until 2020/21, when it will reach £175,000.  The residence allowance will then increase by CPI.  The allowance can be transferred to a surviving spouse, but the allowance (either the individual’s own allowance, or that inherited from a spouse) is abated where the gross value of the estate (i.e. before the deduction of agricultural or business relief) is £2 million.

Top tip:

It is common for spouses to leave their estates to each other so that this qualifies for the IHT spouse exemption.  By aggregating the two estates, it increases the likelihood that the value of the surviving spouse’s estate exceeds £2 million, where the residence allowance is abated, which is a disincentive to passing all assets to the surviving spouse.  In some cases, it will be worthwhile for spouses to move away from the survivor inheriting the deceased’s whole estate.  This can be done via re-writing their will, or by the beneficiaries entering into a deed of variation.  It is also worth noting that the residence allowance and the £2 million limit is tested against the estate at death – it may therefore be prudent to make deathbed gifts (subject to CGT also being considered) to reduce the person’s estate to less than £2 million.

Back to the Top Tax Tips Guide.