Nil rate band to lift inheritance tax threshold by £100K from April

Changes to inheritance tax are set to come into force from 6 April with the introduction of the long-expected nil rate inheritance tax (IHT) break applicable when a residence is passed on death to direct descendants

By 2020, the nil rate band would give a married couple or civil partner couple a £1m tax free IHT allowance, and single taxpayers would have a £500k allowance.

The increased IHT allowance of £100,000 per person is a top-up to the existing £325,000 tax free IHT allowance, and equivalent £650,000 allowance for married couples and civil partners.

However, it will only be available to lineal descendants from 6 April 2017. This means that only children and grandchildren will quality for the tax-free inheritance and not siblings, nieces and nephews, or trusts.

The residence nil rate band will start at £100,000 per person in 2017-18, and then rise to £125,000 in 2018-19, £150,000 in 2019-20, and £175,000 in 2020-21.

So by 2020-21 the effective IHT kick-in point will be estates worth over £1m for couples. It will then increase in line with CPI from 2021-22 onwards.

This measure is set to cost the Exchequer an estimated £1.74bn over the course of this parliament. Inheritance tax is currently paid by around 3.4% of UK estates and raised around £4.7bn in 2015-16, an increase of 22% compared to 2014-15, according to the latest ONS IHT figures.

Any unused nil-rate band will be transferred to a surviving spouse or civil partner. It will also be available when a person downsizes or ceases to own a home on or after 8 July 2015 and assets of an equivalent value, up to the value of the additional nil-rate band, are passed on death to direct descendants.

There will also be a tapered withdrawal of the additional nil-rate band for estates with a net value of more than £2m. This will be at a withdrawal rate of £1 for every £2 over this threshold.

This means that for estates worth more than £2.2m, it will revert back to the basic £325,000 threshold.

‘This a top-up to existing £325,000 IHT allowance for eligible estates; the only restriction is that for estates over £2m it is tapered away, but it is hugely complicated,’ said Nimesh Shah, partner at Blick Rothenberg. ‘It will require everyone to look at their wills to make sure they are eligible. It can only go to lineal descendants so it cannot go to siblings, nieces and nephews, or trusts.’

The measure was first announced in Summer Budget 2015 and was a Conservative manifesto pledge in the run-up to the May 2015 election.

The change will apply for deaths on or after 6 April 2017 where the deceased downsized or disposed of a property on or after 8 July 2015.

When someone dies any unused residence nil-rate band can be transferred to the deceased’s spouse or civil partner’s estate. This can also be done if the first of the couple died before 6 April 2017, even though the IHT relief was not available at that time.

The HMRC guidance on the residence nil rate band states: ‘Although you don’t need to make a formal claim for the RNRB, you’ll need to give details of the amount due and supporting information on the IHT return following a death.

‘You’ll need to make a claim to transfer any unused RNRB (residence nil rate band) from the estate of a late spouse or civil partner. You’ll also need to make a claim for any additional RNRB (residence nil-rate band) as a result of downsizing or disposal of the home before death.’

Trusts not included in a person’s estate

HMRC guidance also states: ‘If a home is held in a discretionary trust, the home would not normally form part of a person’s estate. In these circumstances, the estate would not be eligible for the residence nil rate band even if the home goes to the beneficiary’s direct descendants when the beneficiary dies.

Basic IHT threshold

At Summer Budget 2015, the government had no intention of uprating the basic IHT threshold, stating: ‘The government will continue to freeze the nil-rate band at £325,000 until April 2021.’

There has been some speculation that the Chancellor will review inheritance tax as part of the Budget on 8 March, perhaps to bring in some kind of care-related exemption.

In practice – taper mechanism

Case study

Mr I dies in the tax year 2018/19 leaving an estate valued at £2.1m to his children. This includes a home worth £450,000.

The maximum residence nil rate band in the tax year 2018/19 is £125,000. The estate exceeds the taper threshold of £2m by £100,000. Under the taper rules, the residence nil rate band is reduced by £50,000:

  • RNRB - £125,000 (lower of £450,000 and £125,000)
  • Less amount of taper - £50,000
  • Net RNRB for the estate - £75,000

If value of Mr I’s estate was £2.25m or more, the RNRB of £125,000 would be tapered away completely.

Legislation was introduced in Finance Bill 2016.

HMRC issued guidance on Inheritance Tax: residence nil rate band was released on 7 November.

HMRC case studies on the residence nil-rate band are available here

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