It has been said that there are only two things certain in life “death” and “taxes”. The Chanellor’s recent budget speech addressed the issue of inheritance tax. What do the changes mean for us?
Death duties started life in the 18th century as a tax on the uber rich. Over the centuries this tax has become a trap for many ordinary people with, by comparison, modest income and wealth. The consistent increase in the price of property has pushed many of us into the inheritance tax bracket.
As the law stands today, when we die everything we own above £325,000 is taxed at 40%. This is seen as a harsh tax. Often it means that children have to sell the home where they grew up in order to pay the inheritance tax which is due. No surprise then that this tax is unpopular.
The Chancellor, in his budget speech, announced changes to inheritance tax. The exemption from inheritance tax for a single person will rise by £175,000, from £325,000 to £500,000. Married couples and civil partners on the other hand can benefit from two exemptions of £500,000 each, bringing their total exempt estate to £1,000 000 before inheritance tax bites. This double exemption applies on the second death. These changes will help many people. Those who die leaving a small estate valued up to half a million pounds may not have to pay any inheritance tax. Is this a welcome change? Absolutely! Does it benefit everybody? Certainly not.
The current inheritance tax laws do not make provisions for unmarried couples. Though these couples may have children and be in a stable relationship, not dissimilar to that of married couples or civil partners, yet they do not have the benefit of the double exemption on second death. Unmarried couples are discriminated upon under the present inheritance tax laws and this discrimination continues post budget. Tax planning through their Wills continues to be the way forward for unmarried couples to soften the effect of inheritance tax.
This breather allowing us to potentially pass between £500,000 and £1,000 000 to our children free of inheritance tax may well loose its effect in future as the price of property continues to soar, especially in the capital. After all, it is the price of property mostly that has pushed many people into the inheritance tax bracket. This is likely to happen again in a few years to come when probably another adjustment will be needed. Will the Government of the day see it fit to abolish inheritance tax all together? Time will tell.
Inheritance tax law has always been complicated and the changes this budget will bring about do not make these any easier. There are conditions which have to be met for the additional tax free allowance of £175,000 to apply.
For advice on how the new inheritance tax regime will affect you, please call me 020 8899 6620 or 07825 838 922 or by email on firstname.lastname@example.org.