PD James

Britain’s ‘Queen of Crime’, novelist P D James left more than £22 million in her will when she died last November, probate records show. As well as writing 20 books and working as a senior civil servant, she invested in property, owning two houses, four flats and a valuable beach hut in Southwold, Suffolk.

The writer left most of her estate, valued at £22,403,597 before inheritance tax (IHT) to her two daughters. Based on a 40% tax rate on everything above the IHT nil-rate band (which is currently £650,000 for a married person whose spouse has died), we estimate that her estate will have to pay more than £8 million in tax. (If she had left at least 10% of her estate to charity, the IHT tax rate would have been 36% on everything above the nil-rate band.)

So why did PD James leave so much to HMRC? Given she was a writer of crime and detective novels, you could call it her last unsolved mystery.

What is Inheritance Tax?
Inheritance Tax (IHT) is a tax on the money, investments, property or possessions (your ‘estate’) that you leave behind when you die. It also applies to some gifts you may make while you are still alive. A certain amount can be passed to your inheritors without being taxed; this is known as your ‘tax-free allowance’. The allowance or ‘nil-rate band’ for 2015-2016 has been frozen at £325,000 (£650,000 for couples), the same as it has been since 2010-11. It will stay that way until at least 2020-2021 as the government continues to rebuild its finances following the credit crisis.

Inheritance tax to be scrapped on homes up to £1m
Chancellor, George Osborne announced in July’s Summer Budget that he intended to scrap IHT when parents or grandparents pass on a home that is worth up to £1m (£500,000 for single people). This will be phased in gradually between 2017 and 2020.

This is how it will work.

  • Currently, the £325,000 per person nil-rate band (£650,000 for couples where, when the first one dies, their allowance is passed to the survivor) means that property to that value can be left without attracting IHT.
  • A new tax-free ‘main residence’ allowance will be introduced from 2017, but only on a main residence and where the recipient of the property is a direct descendant (classed as children, step-children and grandchildren). It is being phased in, starting at £100,000 from April 2017, increasing by £25,000 each year until it reaches £175,000 in 2020. (From that point it will rise in line with inflation.)
  • Therefore, from 2017 the maximum that can be passed on tax-free is £425,000 per person, or £850,000 for married couples or those in a civil partnership. (i.e. £325,000 + £100,000 for singles, £650,000 + £200,000 for couples).
  • By 2020, the tax-free amount will be £500,000 for singles (£175,000 property allowance, plus £325,000 nil-rate band) and £1 million for couples (£350,000 property allowance, plus £650,000 nil-rate band), as the main residence allowance rises.

What if my estate is still worth more than £500,000 (or £1 million for couples) by 2020?
Money given away before you die is subject to IHT if you die within seven years of giving the gift. So one tip is to give substantial gifts at a time when you are confident of surviving more than seven years.  Early planning of how to pass on your assets is important.  This is an area where you do need specialist advice.

However, even if you do die within seven years of making a gift, there are several other exemptions worth taking into account to help reduce your estate’s IHT bill, including:

1. You can give £3,000 away each tax year inheritance tax-free
2. Gifts to charities and political parties are inheritance tax-free
3. You can give £250 each year, inheritance tax-free, to everyone you know

Beware: your partner will not necessarily inherit everything free of IHT
Many people assume that if they are married or in a civil partnership, IHT isn’t an immediate concern. But they may be wrong, as the family of comedian Rik Mayall recently discovered. Although Mayall was married, he had failed to write a valid will and died ‘intestate’. That meant that a portion of his estate automatically went to his children, thus triggering an IHT charge that would have been avoided if his estate been left to his wife.

The rules of intestacy changed in October 2014 and are now much more in favour of the surviving spouse. But even now, where there are children there is no guarantee that the spouse will inherit everything. It is therefore absolutely vital to make a will. It is the only way you can exercise control over who gets what, and how much. This is particularly important for unmarried couples, especially those with children.

If you are not married you do not get any special exemption on money left to your partner, so if your estate is worth more than £325,000, there will be a bill.

Inheritance Tax Calculator
This calculator (a link to the ‘This Is Money’ website) is handy way of working out your approximate inheritance tax (IHT) liability until the rule change in 2017. But it doesn’t show you how to use financial planning to mitigate the ultimate tax bill your estate will have to pay. You need an independent financial advisor for that.  Link to Calculator

Next steps
If you feel that inheritance tax (IHT) planning is something that you or your family need, you should make sure that you consult an expert in the field. If you would like to find out more about the financial decisions you should take now to reduce a possible IHT bill, please contact Marchwood IFA. We can liaise with a solicitor to help you draw up a will that protects your family’s future.