The red briefcase and how it affects inheritance tax….

May 2013

The red briefcase and how it affects inheritance tax….

The Chancellor, George Osborne, announced the Budget for the 2013 – 2014 tax year in March and, whilst many changes have been made and new measures introduced, this article intends to highlight the inheritance tax implications which may affect the estate of someone you know or, indeed, your own estate when the time comes. This can sometimes feel like a morbid subject which many put off discussing, but as Benjamin Franklin once said, “in this world nothing can be said to be certain, except death and taxes”  so we may as well be prepared for both!

Contrary to what was announced in the Autumn Budget, the Government has not increased the inheritance tax nil rate band in line with inflation and there will not be an increase until April 2018. This will undoubtedly mean that over time a higher proportion of estates will be subject to paying inheritance tax as the cost of living increases but the nil rate band remains the same.

The current nil rate band is £325,000 which means that estates up to this value are free from paying inheritance tax whereas estates valued over £325,000 are taxed on the surplus above £325,000 at a rate of 40%. For example, if an estate is valued at £400,000, the inheritance tax due is 40% of the surplus above £325,000 i.e. 40% of £75,000 being £30,000.

Inheritance tax is normally charged on the net value of an estate – this is the value of the total estate less any debts which remain outstanding at death and after taking account of any applicable reliefs. The Government has announced plans to reduce avoidance of inheritance tax; firstly, by imposing limitations on the deductions of certain debts owed by the deceased from their estate and secondly, by restricting the availability of reliefs.

Current legislation allows the deduction in full for a debt, irrespective of the amount that is actually paid back to creditors. New legislation will be introduced in the Finance Bill 2013 and will restrict the deduction of the debt to the amount actually paid back to the creditor.  

The rules may also restrict the availability of business property relief where debt is secured on a non-business asset.

Another interesting change is to do with where a husband or wife, or civil partner, is not UK domiciled (i.e. not born and raised in the UK). People would expect that if they leave their estate to their spouse that the gift would be entirely free of tax. Unfortunately, until the Budget, this was not the case where a spouse who was UK domiciled left their estate to their spouse who was not UK domiciled. The situation has now been considerably improved, so long as certain formal steps are taken within the prescribed time scale. However, be warned that the old prejudicial tax rules have not been completely scrapped.

The introduction of a general anti-abuse rule will allow the tax man to attack legal but artificial schemes – in light of this, the more adventurous tax planning may need to be reviewed.

If you have any concerns that you wish to discuss, feel free to contact