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Are your clients ‘in the know’ about inheritance tax?

28 Feb 2017

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 your clients.

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, and work out how much could be taken out of your clients’ estates, as soon as possible.

A client doesn’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 client estates and see how much inheritance tax their beneficiaries are likely to pay.

Explaining the residence nil-rate band

If you’re concerned that rising house prices might have pushed the value of your clients’ 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. If a client doesn’t have any direct descendants, or they wish to leave their 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

A client’s estate may still be able to claim the residence nil-rate allowance even if they’ve already sold their home – for example, because they are in residential care or living with their children. If their home was sold after 8 July 2015, and they plan on leaving the proceeds to their direct descendants, then there are provisions in place that will allow their 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 clients’ estates could claim the residence nil-rate band, it might be worth taking the time to visit our inheritance tax calculator.

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. M2-CAM06287.

[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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