Could the latest Inheritance Tax review ultimately help you and your family?
A sweeping review of inheritance tax has been ordered by Chancellor Philip Hammond amid claims that it is complicated, confusing and possibly causing 'distortions to taxpayer decisions.'
The Office of Tax Simplification, an independent arm of the Treasury, will carry out the review. It will look at everything from submitting returns and paying tax, to making IHT-free gifts and estate planning.
It will then publish its findings which are expected to influence the Chancellor when it comes to any plans to update the system.
One possible outcome is that the IHT gifting limit, currently set at £3,000, may be lifted to allow parents and grandparents more freedom to help the next generation get onto the property ladder.
Campaigners say that because the threshold has been frozen since 1981, it no longer reflects what the average first time buyer has to put down as a deposit in today's market.
When the former Chancellor, George Osborne, announced the changes to IHT in July 2015 - designed to allow middle-class families to leave more of their main residence to their direct descendants tax free - many people welcomed the move.
But though the new, more generous inheritance tax-free allowances sounded great, the new rules were quickly branded downright complicated and confusing.
Soaring property prices
The idea was to bring down the tax bill for millions of normal British families whose parents' or grandparents' estates have soared in value due to two decades of raging property inflation.
In 2009, when the initial nil-rate band was set, just one in ten homes was sold above the threshold. By 2015, one in four homes went for more than £325,000.
So, how does IHT work?
Currently, inheritance tax is imposed at 40 per cent on the estates of those who die, above the main threshold set at £325,000 for a single person. This doubles up to £650,000 for married couples and civil partners who pass on their wealth to their surviving spouse and have not used any of their allowance themselves.
But as house prices escalate, more and more families have found themselves over the tax-free threshold when they inherit.
From 6 April, 2017 an additional 'residence nil rate band' of £100,000 per person was introduced - effectively taking the threshold at which inheritance tax becomes payable to £850,000 for family beneficiaries.
Crucially, it only applies to wealth connected to your main residence and can only be left to direct descendants, for example children or grandchildren.
- The threshold is due to increase again to £125,000 in the 2018/19 tax year, to £150,000 in 2019/20 and to £175,000 in 2020/21.
- From 2021/22 the threshold will increase in line with consumer prices inflation.
The measures discriminate not only those people who don't have children but wealthy individuals who have estates valued at £2m or more. The relief tapers away if a persons' assets exceeded £2m and is lost altogether if that persons' assets reach £2.2m.
For help, advice and guidance on this complicated area of the law please contact Wards Solicitors' Wills, Probate and Mental Capacity team by phone or pop into one of our 11 local offices.