Rishi Sunak, the Chancellor of the Exchequer, yesterday delivered one of the most eagerly awaited Budgets in recent memory. Whilst in the midst of a very unique current climate, all eyes were on how the government would plan to balance out continued support with longer-term measures designed to promote a post-Covid recovery.
The message from the Chancellor was clear. Whilst he cannot expect the public to immediately contribute more in taxes in such uncertain times, changes will in time have to be introduced to claw back some of the spending made during the pandemic.
Rishi Sunak made a whole host of interesting proposed changes, however I would like to focus on how yesterday’s announcement may impact yours or your family’s future inheritance.
The headline message from yesterday was that both the Inheritance Tax (IHT) rate and nil-rate bands have been frozen up to the tax year 2025/26. But what does this actually mean for you? We can start by looking at what the rules are as of today.
- Each individual has a nil-rate band of £325,000 to set against their estate before IHT becomes due.
- If the deceased is leaving their main residence/property to their children or grandchildren, they will receive an additional £175,000 (residential nil-rate band) to set against their estate.
- The two figures combined mean that one individual can leave up to £500,000 of their estate free of IHT.
- If married, a spouse exemption ensures that anything left to your husband or wife is completely exempt from IHT. Meaning that if you left the whole of your estate to your spouse, not only will there not be any IHT to pay on the first death but your nil-rate bands will be left intact.
- Therefore when the surviving spouse ultimately dies, the unused nil-rate bands can be transferred to them to form a combined total of up to £1million to set against their estate before any IHT becomes due.
- Anything above the nil-rate bands and consequently chargeable to IHT is at a rate of 40%.
Frozen tax rates and nil-rate bands are not unprecedented. Whilst historically rising with inflation, the level of the nil-rate band remained unchanged between 2009 and 2017. The introduction of the new residential nil-rate band in 2017 went some way to making up for 8 years of no change.
However the residential nil-rate band has never quite been a favourite since its inception and many have urged the Chancellor to scrap it and replace it with an equivalent increase in the regular nil-rate band. Yet, yesterday’s Budget appears to suggest that it is here to stay for at least the next 5 years.
Action to be taken?
On the face on it, a freeze in IHT rates and the continued existence of the residential nil-rate band might appear to be good news for us all. However the omission to raise these thresholds will undoubtedly result in estates paying more tax over the next 5 years. Whilst wages and assets rise with inflation more and more estates will start to creep above the thresholds when previously they may have kept under.
It is as important as ever to ensure that not only have you got a Will in place which is drafted with current legislation in mind but that advice is taken in regard to IHT planning within your lifetime.
Our experienced Wills & Probate solicitors in London can help you to draft a will that fully meets your needs. To discuss your will with us, get in touch today on 0808 252 5231 or request a call back online.