Estate planning helps provide certainty for your loved ones and if used effectively, could protect your estate from inheritance tax. Find out how your home could save your family money and how to stay one step ahead of rising probate fees.
Inheritance tax relief
Since 2017, there is a new way to cut down on the amount of inheritance tax which your estate could have to pay. However, careful planning is needed if you want to qualify for this relief.
The nil rate band
The nil rate band is the portion of your estate which you can leave to others, tax-free. The current nil rate band is £325,000. When you die, any unused amount of your nil rate band can be transferred to your spouse or civil partner. This effectively 'tops up' their own nil rate band, so that up to £650,000 of their estate is tax-free when they die.
In general, inheritance tax has to be paid on anything above the nil rate band, typically at a rate of 40%.
The residence nil rate band
A change in the law in April 2017 means that it is now possible to increase this tax-free amount. An additional tax-free allowance may apply if you leave your home to your direct descendants. An additional tax-free allowance may apply if you leave your home to your direct descendants. This could also apply to money you receive from selling your house (e.g. from downsizing). This tax relief is known as the residence nil rate band.
The residence nil rate band is currently being increased year on year:
- £125,000 for 2018-2019
- £150,000 for 2019-2020
- £175,000 for 2020-2021
After 2020-21, the residence nil rate band will increase in line with the consumer price index (CPI). Like the nil rate band, any unused amount of your residence nil rate band can be transferred to your spouse or civil partner when you die. This means that, by 2020-21, your estate could benefit from an inheritance tax allowance of up to £1 million.
What do I need to do to qualify for the residence nil rate band?
You have to meet various conditions to qualify and this will involve:
- leaving your property to your direct descendants
- identifying your main residence
- checking the value of your estate
- checking whether your will prevents you from claiming the relief. For example, if you have postponed the age at which your beneficiaries can inherit.
Each of these factors can affect how the tax relief works and whether it will apply to your estate. Making the most of reliefs like this will become increasingly important as probate fees start to rise in 2019.
What is probate?
Probate is the process of dealing with an estate of someone who has died leaving a will. Sometimes it is necessary to obtain a grant of probate in order to deal with the assets of the estate. If there is no will, next-of-kin must apply for a grant of letters of administration which proves their authority to deal with the estate.
To obtain a grant, you make a court application and pay probate fees. These are currently £215, or £155 for families who make their application through a solicitor.
What is changing?
The Government has announced changes to probate fees. If those changes go ahead, as of spring 2019 probate fees will be linked to the size of your estate and will be calculated as follows:
- estates worth less than £50,000 will pay nothing
- estates worth from £50,000 up to £300,000 will pay £250
- estates worth from £300,000 up to £500,000 will pay £750
- estates worth from £500,000 up to £1 million will pay £2,500
- estates worth from £1 million up to £1.6 million will pay £4,000
- estates worth from £1.6 million up to £2 million will pay £5,000
- estates worth more that £2 million will pay £6,000
This new system will create both winners and losers. Some estates will pay less, but many will face paying higher fees (potentially, up to £5,785 more than under the current system).
What should I do about this?
You may wish to take steps now to reduce the amount of probate fees which could apply to your estate, For example, by:
- making gifts to people
- setting up trusts
- holding property jointly
With careful planning, you can stay ahead of these changes to probate fees. However, you should be cautious about how you structure your affairs, as it may have unintended consequences.