Are you ‘in the know’ about inheritance tax?

Inheritance tax rules are changing from 6 April. The introduction of an additional nil-rate band should be good news for married couples looking to pass the family home down to their children or grandchildren. But not every estate can claim it, so it’s worth using our inheritance tax calculator to find out whether it applies to you.

Inheritance tax is frequently in the headlines, but for many people, it’s still something of a puzzle. According to research conducted by Opinium on behalf of Octopus, 54% of UK adults don’t know the current inheritance tax threshold, and 82% of those that own their own home have not made any plans to reduce the amount of inheritance tax due on their death.[1]

That’s worrying, because inheritance tax affects thousands of families every year. In the 2015-2016 tax year, HM Revenue & Customs collected a total of £4.7 billion in inheritance tax receipts. This tax year, according to the Office for Budget Responsibility, more than 30,000 bereaved families will be required to pay tax on their inheritance.[2] So, it pays to think about inheritance tax while you can, and work out how much could be taken out of your estate, as soon as possible, before it becomes your family’s problem to deal with.

Inheritance tax rules

Every individual in the UK, regardless of marital status, is entitled to leave an estate worth up to £325,000. This is known as the ‘nil-rate band’. Anything above that amount is taxed at a rate of 40%. If you are married, or in a civil partnership, then you can leave your entire estate to your spouse or partner. The estate will be exempt from inheritance tax and will not use up the nil-rate band. Instead, the unused nil-rate band is transferred to your spouse or civil partner on their death. This means that, should you and your spouse pass away, the value of your combined estate has to be valued at more than £650,000 before the estate would face an inheritance tax liability.

One of the reasons why inheritance tax remains so unpopular is that, over time, the number of estates caught by inheritance tax – because they are larger than the nil-rate band – has increased. You don’t have to own a very large estate, or even be considered ‘wealthy’ to leave behind an inheritance tax bill. The nil-rate band has remained frozen at £325,000 since April 2009. But the average price of a UK property has risen 33% over the same period.[3]

With much of the UK population’s wealth invested in their property, a growing number of families are being left with a significant inheritance tax bill to pay. If you take a look at our inheritance tax calculator, you can add up the total estimated value of your estate and see how much inheritance tax your estate is likely to pay.

Explaining the residence nil-rate band

If you’re worried that rising house prices might have pushed the value of your estate into exceeding the nil-rate band, then the new ‘residence nil-rate band’ could be significant. From 6 April 2017, it can be claimed on top of the existing nil-rate band. It starts at £100,000 per person and will increase annually by £25,000 every April until 2020, when the £175,000 maximum is reached. But claiming this new allowance is not as simple as it sounds. For starters, it can only be claimed by the estates of people who own their own home. It’s only available to homeowners who plan on leaving their residence to ‘direct descendants’, meaning children or grandchildren. If you don’t have any direct descendants, or you wish to leave your home to someone else, the new allowance can’t be claimed. Also, anyone without a property worth at least £175,000 per person, or £350,000 per couple, will only partially benefit. And, because the new allowance was intended to help ‘middle England’ and those who weren’t especially wealthy, the residence nil-rate band reduces for estates worth more than £2 million. Because of this tapering effect, there is a point at which claiming the allowance is ruled out completely.

Claiming for properties already sold

Your estate may still be able to claim the residence nil-rate allowance even if you’ve already sold your home - for example, because you are in residential care or living with your children. If your home was sold after 8 July 2015, and you plan on leaving the proceeds to your direct descendants, then there are provisions in place that will allow your estate to claim the new allowance. However, this doesn’t apply to homes sold before 8 July 2015.

A profound lack of awareness

The new residence nil-rate band is clearly good news for those who can claim it. But it won’t solve the problem for all. Our research shows that one of the biggest challenges that comes with the introduction of the residence nil-rate band is that public awareness is still incredibly low. Of those surveyed, 82% had never heard of it, while only 8% had a vague idea of the details. Even more worryingly, 90% didn’t know enough about the rules to determine whether their estate would be eligible, while just 3% correctly identified that from April there would be an extra £100,000 available to reduce the inheritance tax due on their main home.

If you’re interested in finding out whether your estate could claim the residence nil-rate band, you can crunch the numbers with our inheritance tax calculator. It can help to determine whether the residence nil-rate band is applicable to your circumstances, and it can also help put you in the right frame of mind before talking to a financial adviser. It’s worth remembering however, that the rules around inheritance tax are complex and our calculator is no substitute for having a conversation about your personal circumstances with a qualified professional adviser who can discuss all the available options with you.

Jessica Franks is Business Line Manager for Inheritance Tax Products at Octopus Investments

Important information:
Personal opinions may change and should not be seen as advice or a recommendation. We do not offer investment or tax advice. We recommend investors seek professional advice before deciding to invest. Issued by Octopus Investments Limited, which is authorised and regulated by the Financial Conduct Authority. Registered office: 33 Holborn, London, EC1N 2HT. Registered in England and Wales No. 03942880. Issued: February 2017. CAM04787.

[1] Opinium research, 4 January 2017. Based on a weighted sample of 2,003 nationally represented UK adults (18+)
[2] Office of Budget Responsibility, November 2016
[3] Nationwide report: ‘UK house prices since 1952’

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Octopus Investments
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