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Bristol Wills reacts to letters on Inheritance Tax published in The Telegraph

A mother stands in front of her house with her daughter, who she hopes won't have to pay inheritance tax
AUTHOR: Graham Southorn
DATE: 3 August 2023

Following a great deal of coverage of Inheritance Tax over the last few days, The Telegraph published letters from two readers who made interesting points on the subject.

Michael Jones wrote that:

If your home is worth less than £325,000 – as mine is, and as are many others in South Shields – you may well be exempt.”

It’s a good point – not every estate is liable for inheritance tax. I’ve noticed in some of the reaction on social media that a lot of people assume it’s universal. They’re unaware of the allowance – currently £325,000 – that you can pass on tax-free.

I’ve also seen media commentators who are seemingly unaware of the second allowance you can claim – called the Residence Nil Rate Band. This applies if you’re a married couple or civil partners and you have a property you’re passing to descendants. This is an additional tax-free amount worth up to £175,000.

It does get complicated, though. If your estate goes over a certain amount, you lose the Residence Nil Rate Band entirely and it also depends on the value of the property you’re passing on, so I recommend taking expert tax advice.

Care fees vs inheritance tax

Michael Jones makes another good point:

If a parent or a spouse goes into a care home, the cost of the care will mean there is no inheritance left for anyone. Surely free care should be the priority, rather than ending inheritance tax for the property-rich.

Whilst it’s a political issue how much our care should be funded, it’s an undeniable fact that the population is growing and also ageing, and that more people than ever need full-time care.

You may not ever need care yourself, not everyone does. But if you do, and if you own a house, you will have to pay a lot of money if you ever need nursing care. Fees of £1,500 per week are not unusual.

If your assets are depleted by care fees, you might not have much left to pass on when you die. And talking about inheritance tax conundrums would then be a distant memory.

To some extent, you may be able to mitigate the risk of a local council selling your property to recoup the cost of care fees. Certain types of Wills could protect half of the value of the house. But you should seek expert advice to make sure these Wills are right for you.

The other interesting letter came from David Buttfield of Amersham in Bucks. He writes:

More than 25 years ago we helped our pregnant daughter and her partner buy a house. At that time it cost less than half the inheritance tax threshold. Today an equivalent house costs more than twice the threshold.

The issue seems to be that a modest house bought decades ago is now worth a lot of money – enough to take a big bite of inheritance tax when the owner dies. The threshold (nil rate band) today is £325,000. He says the house is worth more than twice this amount, so let’s assume it’s valued at £650,000.

Buttfield goes on to say:

Our daughter works in the health service and is poorly paid, but with some help from us she manages. Were she to die the house she shares with her son would have to be sold to pay a six-figure tax bill, and her son would be unable to buy a one-bedroom flat with his half-share of the inheritance.

Inheritance tax for single people

If his daughter has no other assets, her estate would be worth £650,000. If she is single, she would have access to one set of nil rate bands: both the regular nil rate band and the residence nil rate band. Together, that’s worth a combined £500,000.

Inheritance tax is levied at 40% on the excess. So the excess in her case would be £150,000 and 40% of that would be £60,000. If the house was worth £750,000 instead of £650,000, the inheritance tax would creep up to £100,000.

Sticking to a house worth £650,000 and a tax liability of £60,000, that leaves a net estate of £590,000.

He says the son would inherit a half-share, so each child would therefore each inherit £295,000. I assume that the son might live in London, where £300,000 would probably not be enough for a one-bedroom flat.

But if he’d lost nothing in inheritance tax, he’d “only” have £325,000 – probably still not enough for a one-bedroom flat in the capital. (For fun, I searched for London property prices and a one-bedroom flat worth £1.8 million came up!)

In contrast, where I live in Bristol, £300,000 would be ample to buy a small flat in most areas, although even here there are posh locations where you’d come up short.

When I meet clients in Bristol, inheritance tax often comes up in the conversation. But most people agree that it shouldn’t affect their planning. Their aims and intentions come first, tax considerations second.

For more information on inheritance tax, I have a great factsheet that’s well worth downloading (see below).

For further information, download free factsheets on Wills, Trusts, Inheritance Tax, Lasting Power of Attorney and more.

A fan of covers of factsheets on Wills, Lasting Power of Attorney, Trusts and more.

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