The inheritance tax (IHT) allowance (or nil rate band) is available to every individual. In addition, the transferable nil rate band (TNRB) is a helpful facility for married couples and civil partnerships.
Transferable nil rate band
The TNRB rules broadly allow claims for the unused nil-rate band of a deceased spouse (or civil partner) to be transferred to the surviving spouse. The survivor’s nil rate band can be increased up to 100%, or one additional nil rate band. Thus, a surviving spouse’s nil rate band can increase to a maximum (for 2022/23) of £650,000 (i.e., £325,000 x 2). ‘Residence’ nil rate band can potentially contribute to an effective IHT threshold of £1 million per married couple (or civil partnership) in total (i.e., £325,000 plus £175,000 per individual). The unused residence nil rate band is also transferable to a surviving spouse upon a successful claim being made.
Tie the knot – or not?
In some cases, an unmarried couple may have up to four-nil rate bands available between them. For example, both individuals might have been married before, and a TNRB may be available in each case from their respective deceased spouse. By remaining unmarried and leaving their estates to chargeable legatees (e.g., each other), it may be possible to utilise their own nil rate band plus the transferred nil-rate band of their deceased spouse (i.e., £650,000 each).
Identifying assets with possible lower CGT rates
Although currently, we have a two-tiered capital gains tax (CGT) rate level with 18% and 28% for residential property and 10% and 20% for all other assets
Residential 18% & 28%
All other Assests 10% & 20%
Capital Gains tax until 1988 is 30% then next 20 years, it increased to 40%.
Entrepreneurs’ relief (now business asset disposal relief (BADR)) was indeed a breath of fresh air for business owners when it was introduced in 2008 at a low rate of 10%. Although ER (or BADR) has gone through a few iterations since its introduction, it is substantially still the same percentage (10%) and is only available at the disposal of all or part of a business that has been held for at least two years.
However, the issue is that without BADR, these lower rates can only be obtained in very limited circumstances: namely, if the individual has capacity in the basic rate band for income tax purposes.
Capacity in the income tax basic rate band
The ability to be taxed at the lower rate (on any asset) is only available if the individual has capacity in the basic rate band for income tax purposes.
Capital gain £200,000 after annual exemption.
Annual Salary £25,000
Interest Income £1,500
Total Income £26500
£26500 – £12570 = £13,930
As the basic rate band extends to £37,700 in 2022/23, Molly has the capacity to earn another £23,770 and still be charged inside the basic rate before she enters into the 40% tax bracket (the higher rate band). This capacity can be used (or ‘borrowed’) by her CGT charge such that £23,770 will be charged at 18% and the balance of her gain of £176,230 will be charged at 28%. The total CGT payable will thus be:
Capacity left in the basic rate (£37,700 – £13,930)= £23,770 @ 18 % = £4,279
Balance due to CGT at the higher rates= £176,230 @ 28% = £49,344
CGT on total gain of £200,000 = £53,623
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