Can you claim the new £1m inheritance tax break?

WARNING: The reforms could leave thousands — especially those with no children — worse off

THOUSANDS of homeowning families will see their potential inheritance tax bills slashed when a new residence allowance comes into force tomorrow. It’s the first step of a reform that will, by 2020, see some families able to give away £1million without paying inheritance tax.

But the change is clouded by controversy, and some couples will not benefit. Under the reforms, those with direct descendants, such as children and grandchildren, will get a £100,000 tax-free allowance against the value of their property. This is on top of the existing £325,000 allowance everyone already gets.

These allowances can be combined by spouses and civil partners.

That means families who own property worth at least £200,000 will effectively be able to give away £850,000 tax-free from tomorrow. As a result, they will see their inheritance tax bills cut by up to £80,000.

However, for those in England and Wales, a new probate tax due in May means that much less well-off families could see death taxes rise overall.

And it also means widows face death taxes on their spouse’s estate for the first time since the Seventies.

This is because the probate tax will be charged on assets owned solely by the first partner to die, even if they leave them to their spouse or civil partner.

If bills are triggered when both the husband and wife die, some of their money could be taxed twice for death duties. In some cases, it could mean someone with an estate worth more than £1million ends up paying an extra £4,000.

WHEN SOMEONE DIES

CHECK if there is a will. This will name the executors in charge of sorting out the estate. If there isn’t a will the next of kin should do it.

In Scotland, when dealing with a deceased’s estate, you need to obtain ‘confirmation’ before any money and other property belonging to the deceased can be released. It’s often a bank, building society or insurance company that will ask for this.

‘Confirmation’ is a legal document from the court giving the executors authority to uplift any money or other property belonging to a deceased person from the holder (such as the bank), and to administer and distribute it according to law. An application is lodged with the sheriff court.

When applying for confirmation, an executor must provide a list of all the deceased’s property at the time of death. The list – called an inventory – might include money, houses, land and shares. Confirmation is possible only if the inventory includes at least one item of money or other property in Scotland.

There are statutory Court fees for issuing confirmation in Scotland. If the value of the estate is up to £50,000, there is no fee payable to the Sheriff Court, but for estates with a value from £50,000 to £250,000, there is a £250 fee and for those exceeding £250,000, it is a £500 fee.

INHERITANCE TAX

IF YOU leave money and property to your spouse or civil partner it will not be taxed, no matter how much it’s worth.

Money left to charities and political parties also falls outside the inheritance tax net.

You are also permitted to gift a certain amount of money each year to relatives without owing tax.

And anything gifted more than seven years before you die is exempt.

Other bequests fall within the IHT regime.

An individual can give away up to £325,000 without tax being charged — this is known as the nil rate band.

Any assets above this are taxed at 40 per cent. For example on an estate of £425,000, the top £100,000 is taxed at 40 per cent, giving a £40,000 bill.

With spouses and civil partners, if the first person to die did not use all of their allowance then the remainder can be added to the survivor’s. This gives couples a potential allowance of £650,000.

This nil rate band has been frozen since April 2009 and will remain so until April 2021.

From tomorrow the new residence allowance will allow each person to give an extra £100,000 away taxfree as long as that money comes from a residential property. This allowance will be increased by £25,000 each April until it hits £175,000 per person in April 2020.

Couples with a property worth £350,000 or more could then potentially have an IHT allowance of £1million.

A key point is that as long as the second spouse or civil partner dies after April 6 this year, the first person’s residence allowance can also be used — no matter how long ago they died. So descendants will benefit from the full £200,000 allowance.

WINNERS AND LOSERS

CHILDLESS couples and their close relatives are the big losers.

This is because to benefit from the new residence allowance you must leave your property to a direct descendant — so children and grandchildren.

Step-children and adopted or fostered children are also considered direct descendants but nieces, nephews and godchildren are not.

So this means that while those with children and grandchildren will be able to give away £850,000 without a tax bill, childless couples would owe £80,000.

From April 2020 couples with direct descendants could leave a £1million estate tax-free, while the relatives of childless couples face a £140,000 bill.

Around a fifth of women over the age of 45 do not have children — although some may become stepparents, adopt or foster in the future.

Another group who could lose out are childless siblings who share a family home.

They already suffer because they cannot transfer their IHT allowance as married couples and civil partners can.

Patricia Mock, tax director at accountant Deloittes, says: ‘The key thing is that the £350,000 representing the value of the home must be left to direct descendants.

‘The rest can be left to anyone you please.’

Another wrinkle will see a clawback for the wealthiest.

Where an estate is worth more than £2million then the housing allowance will be taken away at the rate of £1 for every £2 the estate is worth above this level.

So if the whole estate is worth £2,100,000, then £50,000 will be removed from the residence allowance.

This means estates worth more than £2.2million, or £2.4million for a couple, won’t benefit at all.

By 2020 the maximum estate size to benefit from the housing allowance will be £2.7million where two allowances have been combined.

A Treasury spokesman says: ‘Just 4 pc of people pay inheritance tax and because of our reforms an extra 20,000 people will be taken out of paying the tax by the end of the Parliament.’

OTHER QUESTIONS: WHAT IF I DOWNSIZE OR GO INTO CARE?

YOU can take the IHT residence allowance with you if you sell your home and buy one that costs less or go into care. There is a complex formula to decide what your new allowance will be. Details are at gov.uk. It is possible to have an allowance greater than the value of your new home so cash released would be protected. These rules have been backdated so that anyone who has downsized or gone into care since July 8, 2015, when the new rules were announced, benefits. You must keep good records of any house sale as the executor will need these in the future.

IS THE ALLOWANCE ONLY AVAILABLE ON MY MAIN HOME?

NO. If you own more than one home, the executors or administrators of your estate can choose which home to set the allowance against.

However, it can only be used against one property.

COULD I ADOPT MY NIECE OR NEPHEW SO THAT THEY CAN BENEFIT FROM THE IHT ALLOWANCE?

WELL, you’d have to agree it with the parents and child! But the biggest stumbling point is that in the UK the adopted person must be under 18 and have never been married or in a civil partnership.

WHAT IF WE USED A NIL RATE BAND TRUST WHEN MY SPOUSE DIED?

NIL rate band trusts were commonly used before it became possible to transfer the inheritance tax nil rate band allowance between spouses. Savings (or even a share of the family home) could be transferred into the trust up the nil rate band allowance.

Even if this were done, the £100,000 residence allowance for that person is still available.