Inheritance Tax Updates

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Inheritance Tax calculations in JCS have had a number of improvements recently. Some of these are clearly visible if you have used this functionality before, others are a little bit more subtle.

Residential Nil Rate Band

This is one of the more obvious updates. The Residential Enhancement for Nil Rate Band came into effect April 2017, allowing an individual up to £100,000 of extra Nil Rate Band where a qualifying property is closely inherited. This will rise incremently to £175,000 by 2020/21. The residential enhancement available to an individual will be tapered by £1 for every £2 that an individual's estate exceeds the Taper Threshold of £2 million.

For individuals that have sold their main residence and purchased a smaller property that is valued less than the maximum residential enhancement in that year, their RNRB may be increased by calculation of their downsizing allowance.

The inclusion of the Taper Threshold has required that certain assumptions made in JCS in the past are no longer valid. Previously, a joint IHT calculation in JCS assumed all assets would be inherited by the surviving spouse, and that 100% of Nil Rate Band would be transferred to the surviving spouse. Meaning that the estate is the total of the couple's assets, and the NRB available would be 200%. This was a fairly simple model that worked for most scenarios, including gifts brought into charge on first death.

The joint IHT calculation model in JCS is now slightly different. It requires that an individual IHT calculation is performed for both client and partner, to determine the size of each estate respectively. This will determine any impact on the RNRB available due to the Taper Threshold, and thus any transferred/unused RNRB passed to the surviving spouse. Therefore, the joint calculation is now actually the IHT calculation on the second death, where transferred RNRB is restricted by the estate of the first death, transferred NRB is the remainder of NRB from first death after gifts in the last seven years have been brought into charge, and that 100% of the estate is inherited by the surviving spouse.

This change in how JCS now calculates IHT, allows some new functionality to be exposed to a planner.

Individual IHT Calculations For A Married Couple

Previously, it was only possible to perform an individual IHT calculation if a client had been entered into JCS without a partner. Now, it is possible to perform an individual IHT calculation on either the client or the partner. The estate value for client and partner is based on assets owned by each respectively, where joint assets are deemed to be owned 50/50. Calculation of gifts in the last seven years is based on which of the couple was the donor, joint gifts are deemed to be 50/50.

These scenarios will show the effect of either the client or partner dying on the day of calculation, on the assumption that 0% of the deceased's estate will be transferred to the surviving spouse. In other words eliminating the IHT exempt transfer.

Alternate Joint IHT Calculation Scenarios

Joint calculations were previously based on the assumption of the eldest of the couple dying first. The order of death can affect the outcome of the IHT calculations due to factors such as gifts that come into charge on death, payout of life policies not held in trust, payout of death benefits from a pension scheme etc, and there was no way to customise this without modifying the age of the clients in question.

With the latest release, it is now possible to generate a joint calculation under any of the following scenarios:

  • Client 1st death
  • Client 2nd death
  • Eldest 1st death

The last scenario is obviously a duplicate of one of the first two scenarios, and is the default scenario used within Profile Reports.

Transferred NRB In Joint IHT When Gifts Brought Into Charge On First Death

With the updated model for joint IHT calculations, the final calculation is that of the second death only. This calculation will only bring into charge any gifts from that individual, and so will seem to be ignoring gifts from the individual that died first. This is now factored in through the amount of unused NRB available after first death that can be transferred.

On first death, gifts that are brought into charge will use up the Nil Rate Band (including any unused NRB from a previous spouse), and will affect how much can be transferred to the surviving spouse. If the value of gifts brought into charge exeed the total NRB available, the unused NRB available for transfer will be zero, and there will be IHT due on the first death. This charge will be added as an additional amount to the total tax due in the second death calculation.

Using this model it is possible to simulate the scenario where up to 400% of NRB can be utilised. The example below can be modelled within JCS.

Bill dies in August 2017, leaving an estate of £750,000 to his wife, Sally. Within the last seven years, Bill had made total gifts to his children of £650,000, he is entitled to 100% transferred NRB from his previous wife who died in 2001.

Bill's total NRB percentage is 200%, which in 2017 is £650,000.

Total assets chargeable to IHT are £750,000, plus £650,000 in gifts. However, the estate will be inherited by Sally and so is exempt. The remaining £650,000 fully utilises the NRB, leaving zero transferred NRB for Sally.

Sally dies later in the same year, with an estate of £750,000. Sally made no gifts in the last seven years, but she is entitled to 100% transferred NRB from her previous husband, who died in 2005.

Sally's total NRB percentage is 200%, which in 2017 is £650,000.

Total assets chargeable to IHT are £750,000. £650,000 of this is charged at zero, due to the Nil Rate Band, the remaining £100,000 is charged at 40%.

As a couple, the total amount charged at nil rate is £1,300,000, or 400% of Nil Rate Band.

Annual Exemption Gifts and Other Exempt Gifts

Any discussion about IHT calculations in JCS would not be complete without mentioning exempt gifts and how they are handled in the JCS model, as these are often misunderstood and entered incorrectly.

Annual Exempt gifts should always be entered into JCS as Potentially Exempt Transfers. JCS will automatically allocate the first £3,000 of gifts per year to be exempt (both client and partner exemptions will be allocated). Even if a gift to the value of £12,000 was entered, the first £3,000 would be marked exempt, and the remaining £9,000 would come into charge upon death. If no gifts were made in the previous year, or the annual exemption was not fully used, this will automatically be carried over for one year to increase the annual exemption for that year. Annual Exemption gifts are always handled in the calculations and are carried throughout the entire calculation. If they are not entered into the list of gifts, as "they are exempt, so I don't need to", then JCS will apply the annual exemption to other gifts that have been entered instead.

Other Exempt gifts, are gifts that are completely exempt from IHT, and so can be left out of the calculation completely. These would include gifts to charity, gifts to spouse, gifts for weddings etc. JCS still allows a user to enter these gifts for record keeping purposes, but they will never form part of the IHT calculation.