Emma Thorpe is an Associate Solicitor in our Wills, Tax, Trusts and Probate Department. She explains below how the new IHT bands will be calculated.
Inheritance Tax (IHT) is charged at a rate of 40% on the value of an estate above the NRB after taking into account the value of any chargeable lifetime transfers and deducting any liabilities, reliefs and exemptions that apply.
The existing NRB is £325,000 and will remain frozen at this figure until 2020/21.
Where an estate qualifies for spouse or civil partner exemption, the unused proportion of the NRB belonging to the spouse or civil partner that dies first can be transferred to the estate of the surviving spouse or civil partner so that the value of their estate up to £650,000 is exempt from IHT.
For deaths on or after 6 April 2017, the Additional Nil Rate Band will be available when a residence is passed on death to direct descendants. The ANRB will be in addition to the NRB, and any unused ANRB can be transferred to a surviving spouse or civil partner where the second death is on or after 6 April 2017.
The ANRB will be as follows:
The government has forecast that 63,000 estates will have an IHT liability by 2021. This is largely due to the expected increase in the value of houses. It is forecast that the additional IHT free band will reduce that figure to 37,000 estates.
This will enable more home owners in the UK to pass their property to their children free of Inheritance Tax (IHT) after their death.
At present, IHT is payable at a rate of 40% on the value of estate assets in excess of the tax-free allowance known as the nil rate band; this is currently £325,000 per person. Married couples and civil partners can transfer their unused nil rate band to each other on first death therefore bringing the total tax-free allowance on second death to £650,000.
The proposed family home allowance would bring the total transferable tax-free allowance for married couples and civil partners to £1,000,000 thereby allowing parents to pass on their home to their children without any IHT liability on the death of the surviving parent.
The new allowance would be gradually reduced for properties worth more than £2,000,000, reaching zero for homes worth more than £2,350,000million.
The Conservative Party also announced that the full increased transferable amount will be applied retrospectively. Therefore if one spouse or civil partner has died before the policy comes into effect it would still benefit existing widows and widowers.
On a note of caution it should be remembered that the Conservative Party reneged on a previous pledge to increase the IHT allowance. The latest pledge raises hopes again for millions that they will be able to pass on their assets to their families free of tax.