Reducing your estate to below £2m could save 60% on tax

16th June 2015

The new Government is expected to introduce a new inheritance tax proposal in July’s budget that will significantly affect those with estates of between £2m and £2.7m. We are confident these new proposals will also present some with the ability to save 60% tax with the help of expert financial planning.

Inheritance tax is often referred to as a “voluntary tax”, but many believe the planning can be a lot of effort or sounds too complicated to embark on.  We have found through significant experience, that we have the expertise to allay these concerns.

The Office for Budgetary Responsibility (OBR) expects that by 2018/19 there will an increase in the number of estates with an inheritance tax liability and more people will be looking at ways to mitigate their liability to ensure their wealth can be passed to the next generation.

The Proposed Changes include:

  • The creation of a new family home nil rate tax band of £175,000 per person.
  • This can be transferred between married couples, making it worth a maximum of £350,000.

This does not impact on the current nil rate band of £325,000 per person, which can be transferred between a married couple, making it worth £650,000. This would mean that parents wishing to leave the family home to children (including step children and adopted children) could leave a family home worth up to £1m, free of inheritance tax. This is done by adding the new tax band of £350,000 to the existing nil rate band of £650,000.

It is expected however that the new tax band will be tapered, meaning for those estates worth between £2m and £2.7m, the band would gradually reduce to nil.  We therefore believe inheritance tax planning for people in this bracket becomes even more tangible and important.

For example, a married couple with an estate valued at £2.7m would have an inheritance tax liability based on £2.05m (£2.7m less nil rate band of £650,000), which would equal £820,000 tax. However if they were able, with appropriate advice and planning, to reduce the estate to £2m, the tax liability would reduce by £420,000 to £400,000.

Therefore, by reducing the size of the estate by £700,000, it is possible to reduce the tax liability by £420,000, which is equal to 60%.

These are our understanding of the proposals; however it is likely the exact details may vary when they come into effect.

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