Q: I have heard that the rates of inheritance tax are going to change in the near future and when it happens I will be able to leave up to £1 million to my family tax free. Is this true and if so when is it going to happen?
A: Yes it is true. Over the next five years there will be a staged policy whereby the level of your estate that you can pass on to your family will reach £1 million in certain circumstances.
At the moment everyone has an inheritance tax ‘nil-rate band’ of £325,000. This means the first £325,000 of their estate (being everything they leave when they die and give away in the last seven years of their life) is not liable to inheritance tax, and everything above is taxed at 40%.
In addition, everything a married person gives their spouse is automatically inheritance tax free; whilst the deceased partner also passes on any unused ‘nil-rate band’ to their spouse. So when the surviving spouse dies they can potentially leave up to £650,000 to their beneficiaries, tax free.
From April 2017, in addition to the existing ‘nil-rate band’, the government is introducing a ‘main-residence nil-rate band’ applicable to your home and initially allowing an extra £100,000 ‘nil-rate band’ when you leave your home to your direct descendants (i.e. children, grandchildren etc).
This £100,000 will increase by £25,000 a year until reaching £175,000 in 2020, potentially increasing your tax free allowance to £500,000 each. If your spouse passes away first any unused ‘nil-rate band’ from them passes to you, allowing you to leave up to £1 million tax free to your family.
There are certain circumstances where you may not qualify for the main residence nil rate band (e.g. if you leave your property upon trust). It is therefore vital that you take appropriate legal advice when preparing your will.