Will the Inheritance Tax Nil Rate Band changes affect you?

Posted 15/10/2015

One of the most interesting announcements of the last Budget was the proposed introduction of the Inheritance Tax Residence Nil Rate Band (the ‘RNRB’).

It is worth remembering the context in which these proposals have been presented, namely the long standing promise of the Tory Party in 2007 to extend the Nil Rate Band to £1m whilst more recently confirming that the main Nil Rate Band is to be frozen at £325,000 until April 2021.

It is also worth reminding ourselves of what the current position is:

1. What is the Nil Rate Band?
2. This is currently £325,000 and means that apart from gifts to a Spouse, Civil Partner or Charity (all of which are exempt from Inheritance Tax (‘IHT’) the first £325,000 is taxed at nil so that it is only assets in excess of that which are taxed at 40%.

Q: How does this operate as between Spouses (including Civil Partners)?
R: If the Spouse who dies first gifts all taxable assets to the survivor then, subject to any life time gifts within the last seven years, the survivor’s estate will have the benefit of two Nil Rate Band’s and so currently a total of £650,000.

Q: How will this be extended by the new proposals?
R: When the new rules are finally brought into full effect each spouse will have the potential for a further £175,000 worth of RNRB. If the first to die gifts their interest in their house to their spouse then between them and on second death there could be a further total of £350,000 of RNRB to be added to the standard Nil Rate Band hence the £1m allowance total for spouses.

Q: When will this become law?
R: The proposals are currently only in the Finance Bill and will not become law until later this year and even then the new allowances will not come into effect until 6 April 2017. The allowance for the first year (2017-18) will only be £100,000 increasing by increments of £25,000 each year until it reaches £175,000 for the year 2020-21.

Q: Who will be able to benefit?
R: Only the children and (great) grandchildren of the deceased including step children, foster children and adopted children. They also have to benefit under a Will and not by life time giving.

Q: Will there be a limit to the benefit?
R: The new allowance will be limited by the value of the property so that if on second death the combined estate of the survivor including the house exceeds £2m then the additional RNRB will be reduce by £1 for each excess of £2.

Q: What if parents have downsized or totally sold their property before they die?
R: Provided this happened after the 8 July 2015 then the RNRB may well still be available provided that their children inherit by Will the cash equivalent of the property as was. There are some quite involved calculations to be made here as to exactly how this will operate.

Q: Do you need to change or update your Will?
R: It is always worth reviewing Wills when new legislation such as this comes in to force. However it is not worth making any changes just for this until the provisions have become law and a number of outstanding technical points have become clearer as changes are still being made. However, if the property is involved in any sort of trust then it is likely that a change may be required.

We will provide further updates when the position becomes clearer but you have any individual queries in the meantime please contact a member of our Lifetime Planning team.