The beginning of the new tax year on 6 April is often accompanied by changes to allowances and tax thresholds. But like so much of life, 2021 proves to be a bit different.
With the Chancellor’s announcement in his March Budget, IHT thresholds have been kept on hold with an indication that the position will not change untiil at least 2026. The position for Capital Gains Tax allowances is the same. So what’s the effect?
An individual still has a tax free allowance of £325,000 before Inheritance Tax (IHT) will affect their estate. That’s been the figure since 2010/11 but in that time inflation and in particular rising house prices mean that many estates that previously would not have been affected by IHT now fall into its grasp. If the main allowance of £325,000 had kept up with inflation it would now be more than £425,000. More alarmingly, the annual allowance for gifts (which is also a great way to pass sums tax free) has been £3,000 since the 1980s. Had it risen with inflation, the allowance would have more than tripled.
An additional allowance (called the Residential Nil Rate Band) was introduced a few years ago and is now worth an additional £175,000 provided the deceased is passing their house to a “direct descendant”. So for most people with children or close relatives (the definition of “direct descendants” does have some notable exceptions) that makes an overall allowance of £500,000 for an individual.
If the deceased is married or in a civil partnership there is the possibility that they leave everything to their spouse / partner which means the inheritance is exempt from IHT. As an extra bonus, the deceased’s allowances (so far as not used up otherwise) pass to the spouse or partner, meaning the survivor could have allowances on their estate when they die of up to £1 million.
One million pounds is a considerable sum but we have come across many estates where the increase of house prices and investments mean families can face unexpected IHT bills. Over the next 5 years, with the thresholds being frozen, the number of estates potentially affected will only increase. With that in mind, making plans for the future is even more important. With careful planning your assets can pass to those you want without the government potentially taking a 40% bite.
IHT rules generally and the Residential Nil Rate Band in particular are complex and there are several pitfalls that can catch the unwary so it is always best to get specific advice on what allowances will apply. We have all been through a challenging year and hopefully things will now get better. In the meantime, this is a good opportunity to take stock and make sure your Wills and Powers of Attorney are up to date and your strategies still reflect your goals. Taking steps now can make a significant positive difference for the future.
Graeme Dickson is a Legal Director in our specialist Private Client team. For more information about Inheritance Tax Planning please contact Graeme on 0131 225 8705 or email firstname.lastname@example.org, alternatively contact any member of our Private Client Team.