What is not included in the estate – whether deducted or exempt – for valuation purposes is also important to consider.
Things that are deducted from a client’s estate for valuation purposes include:
- The mortgage.
- Outstanding loans or debts.
- Overdrafts and credit card balances.
- Amounts borrowed from other individuals (with valid documentation).
- Unpaid utility bills.
- Other bills.
- Funeral expenses, within reason.
- Unpaid income tax or capital gains tax bills.
Property
But the biggest thorn in the flesh is the family home.
Soaring house prices have helped some homeowners to become millionaires, but as the IHT threshold has been stubbornly at £325,000 since 2009, hundreds of thousands of modest households are now potential targets for this tax.
Without proper financial planning, Mr Jones warns, “the government is undoubtedly receiving tax that with proper planning wouldn’t need to be paid”.
Moreover, there are exemptions to use. In April 2017, HMRC introduced a tax-free residence allowance – the residence nil-rate band (RNRB) which started at £100,000 and is due to rise by £25,000 per year until it hits £175,000 in 2020.
This means that a couple could effectively leave up to £1m worth of property to their children, step-children or grandchildren (2x personal allowance of £325,000 plus 2x residential allowance of £175,000) without paying tax, provided the property is the client’s residence, rather than a buy-to-let property or holiday home.
Will Hale, chief executive of Key, calls this a “useful exemption”, but says many people do not understand this.
Sarah Saunders, personal tax manager for RSM UK, says: “If you plan to leave the house to somebody other than a direct descendant or your spouse, then it may lead to a high tax charge, and it is not easy to transfer the value while you continue to live in the house.
“If, however, the property is left to a linear descendant it can qualify for the RNRB, effectively expanding your tax free estate materially.”
Using the RNRB
Ms Kneen highlights the main points of the residence nil-rate band to help value.
If clients own their home (or a share in it), their tax-free threshold can increase by an extra £150,000 to £475,000 (from £325,000).
This is if it is left it to a direct descendant (such as children or grandchildren) and their estate is worth less than £2m.
This means that in 2019-20 a couple can pass on £950,000 tax-free.
The residence nil rate band is set to rise to £175,000 from April 2020.
Precious pile?
Rhoda Copper, chartered tax adviser and council member of the Institute of Professional Willwriters, says if a person who is married or in a civil partnership passes away but does not use their nil rate bands on death, then those bands will be available for their spouse or civil partner to use on their death.
She reminds advisers: “If IHT is payable, it is due by the end of the sixth month after the person’s death.
