Government U-turn on inheritance tax: the nil rate band frozen until 2019

On 11th February 2013 the Government announced that the inheritance tax nil rate band will be frozen until 2019. The tax savings generated will be used to part fund the government’s plans for elderly social care.

Inheritance tax is chargeable on assets held at death and certain life-time gifts over and above the ‘nil rate band’ which has been set at £325,000 since 2009. In the 2012 Autumn Statement, the inheritance tax threshold was due to increase in line with inflation with effect from the tax year 2015/16. However, on the 11th February, the government made a U-turn and announced that the Inheritance Tax nil rate band would now be frozen until 2019.

If the nil band rate had been allowed to grow in line with RPI, by 2019 it is estimated that it would be around £420,000. This policy is likely to affect more than four million families in the UK – who will now be required to pay 40% tax on assets held on death over £325,000, subject to any available reliefs and exemptions.

Many families are unaware of the impact of inheritance tax and can face large unexpected tax bills, which could have been reduced with specialist tax planning.

The three main yearly inheritance tax exemptions are: –

The Annual Exemption
Each tax year you can give away £3,000 free of IHT. If you do not use all of the exemption in one year, you can carry forward the unused element, but only to the following tax year, when it can only be used after that year’s exemption has been exhausted. For instance, if you did not use the annual exemption in the last tax year, 2011/12, you can still use it by 5 April 2013, but only once you have fully used the 2012/13 exemption. Thus a gift of up to £6,000 (£12,000 for a couple) can escape IHT.

The Small Gifts Exemption
You can give up to £250 outright per tax year free of IHT to as many people as you wish.

The Normal Expenditure Exemption
The normal expenditure exemption can be the most valuable of the yearly IHT exemptions, particularly when combined with pension planning. A gift is exempt from IHT provided that you make it regularly, it is out of income (not capital) and its does not reduce your standard of living. Importantly, there are no cash limits for this exemption. You could give away dividend or interest income which would otherwise usually be reinvested, with the normal expenditure exemption covering the gift.

Inheritance tax planning is complex. If you would like to talk to us about inheritance tax planning, please telephone 020 3865 2379


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