Inheritance tax relief: When a million may not be a million
PUBLISHED: 09:00 23 May 2016
In 2007, the Conservative Party proposed increasing the current Inheritance Tax (IHT) threshold of £325,000, known as the nil-rate band, to £1 million. But what has happened since?
Almost ten years on, there will be an additional nil-rate band when a residence is inherited by your close descendants (namely, your children and grandchildren, or their spouses or civil partners) – defined as “closely inherited” - on or after 6 April 2017.
The objective is to reduce the burden of IHT for most families by making it easier to pass on the family home to direct descendants on death without suffering an IHT charge. It will only affect individuals with direct descendants who have an estate (including a main residence) with total assets above the nil-rate band.
You will be forgiven for believing that the effect of the new residential nil-rate band (RNRB) will favour everyone with an Inheritance Tax-free amount of £1 million, as widely reported by the media. But the reality is that only a minority of individuals will currently have the correct combination of nil-rate bands to total this magic number.
How does it work? The maximum amount of relief will increase as follows:
• £100,000 for 2017/18
• £125,000 for 2018/19
• £150,000 for 2019/20
• £175,000 for 2020/21.
It will then increase in accordance with the Consumer Prices Index (CPI) from 2021/22 onwards. The amount of relief will be restricted to the value of the residence (net of any mortgage) that will be “closely inherited”. But, if the value of an individual’s estate is more than £2 million, RNRB will be reduced at a rate of £1 for every £2 above the threshold.
Any unused RNRB can be transferred to the surviving spouse or civil partner and, for the purpose of such “carry forward”, an individual who dies before 6 April 2017 is considered to have a RNRB of £100,000.
If you sold your house or downsized on or after 8 July 2015, the relief may still be available if equivalent assets up to the value of RNRB are “closely inherited”.
• Keep all paperwork if you are downsizing.
• Consider making gifts to reduce the value of your estate below the £2 million threshold.
• Avoid aggregating your estate with your spouses or civil partners to prevent a breach of the £2 million benchmark.
• Switch debts away from the residential property as such property will be reduced in value by debts charged against it for the purpose of RNRB.
The proposed legislation is arguably unfair in that it does not apply to individuals who do not have children and is too focused on owning (or having owned) a residence. It does not assist, for example, those individuals in rented accommodation, who have decided to invest in buy-to-let properties which do not qualify under the RNRB.
Perhaps the nil-rate band, which is frozen at £325,000 until 2020/2021, could instead have been increased for everyone to achieve a fairer outcome.
For legal advice on wills and probate, private wealth and tax planning, please contact Matthew Briggs or Liz Garvey in the Guildford office of Penningtons Manches on 01483 791 800 or visit our website at www.penningtons.co.uk.