Tony Granger provides an update on the inheritance tax residence nil rate band, the new probate fee ‘tax’, and an anti-avoidance measure affecting non-UK domiciliaries for inheritance tax purposes.
Following the spring Budget in March 2017, it was announced that an increased tax take is expected from inheritance tax (IHT) receipts of £1.6 billion over the next five years, from £4.7 billion in 2016/17 to £6.2 billion in 2021/22.
This, coupled with increased probate fees, has caused much anger, as taxes on the death of a person are escalating.
Residence nil rate band
From 6 April 2017, an additional 'residence nil-rate band' of £100,000 per person is introduced when leaving the family home to direct descendants - children, grandchildren, step, adopted, or foster children.
The threshold will increase to £125,000 in 2018/19, £150,000 in 2019/20, and £175,000 in 2020/21.
Residential property IHT for non-UK domiciliaries
Previously, UK residential property owned through a non-UK company or trust by a non-UK domiciliary (i.e. not domiciled or deemed domiciled in the UK for IHT purposes) has potentially been outside the scope of IHT.
From 6 April 2017, such residential property holdings held in trust or by a company will fall into the IHT net. There is a new category of ‘non-excluded property’, which is within the scope of IHT. Such non-excluded property will be subject to IHT at up to 40%. In addition, the proceeds of the sale of shares in a non-UK company which owns UK residential property will, according to the draft legislation, be non-excluded property for a two-year period running from the date of the sale.
In addition, the rights of a creditor in respect of a ‘relevant loan’ (e.g. a loan directly or indirectly used to finance the acquisition of a UK residential property interest) are also potentially caught by the new IHT legislation. Where assets have been made available as security, collateral, or a guarantee for a loan that has been used to purchase or maintain a UK residential property interest they will, from 6 April 2017, be within the scope of IHT.
The owner of the UK residential property itself (whether it is held outright or through some type of structure) may still be able to mitigate their exposure to IHT, for example by taking out life insurance.
Increasing probate fees
Currently, probate fees are set at a flat rate of £215 (or £155 if done through a solicitor) on estates over £5,000 in value in England and Wales – in Scotland and Northern Ireland it will remain £200. The increases (from May 2017) are seen as a ‘tax hike’ for the bereaved.
The proposed probate application fees are as follows:
- £0 if £50,000 or less
- £300 for estates worth more than £50,000 and up to £300,000
- £1,000 for estates worth more than £300,000 and up to £500,000
- £4,000 for estates worth more than £500,000 and up to £1 million
- £8,000 for estates worth more than £1m and up to £1.6 million
- £12,000 for estates worth more than £1.6m and up to £2 million
- £20,000 for estates worth more than £2 million
Practical Tip:
Non-UK domiciled individuals should review existing offshore structures. Consider life assurance to cover the new IHT liability. Unwinding company and trust structures can be expensive and can activate other taxes. Loans and mortgages will need to be checked for effectiveness. The government is set to increase what it takes from IHT and other taxes. Proper planning is essential to avoid this.
