Inheritance Tax changes: the most recent changes with respect to “IHT” came into effect from 6 April 2017.
From 6 April 2017, a Residence Nil Rate Band (“RNRB”) was introduced. This will be of interest to anyone who owns their own residence.
As we know, an Englishman’s home is his castle, and rates of home ownership in the UK are high, making the change of fairly universal interest. All the more so in London and the South East, where property prices are so high.
In broad terms, the change in the legislation is to increase the amount of a person’s estate which can be passed on free from inheritance tax (“IHT”), where their estate includes their main residence, by providing an additional nil rate band – the RNRB.
IHT is a tax paid on assets left when someone dies, after deducting the nil rate band and any other exemptions and reliefs that have been applied.
IHT may also be applied to certain lifetime transfers, including transfers to trusts and also to outright gifts in the seven years prior to death. See below a general outline of IHT and how it applies following a summary of the recent inheritance tax changes.
What do the latest inheritance tax changes mean for me?
The nil rate band (“NRB”) is currently set at £325,000 (as at December 2017) and it has been at this level since 6 April 2009.
Increasing house prices have meant that more people than ever before have an estate which exceeds the nil rate band, and therefore IHT is payable on their estate on death.
The introduction of the RNRB is an attempt to address this.
The value of the RNRB is being increased between 2017 and 2021 as follows:
|Year||Residence Nil Rate Band|
For later years, the threshold will go up in line with inflation based on the Consumer Prices Index.
The basic premise of this change to the inheritance tax rules appears relatively simple. But the reality is that the detailed legislation and calculations can be fairly complex.
How the RNRB works on death
The RNRB can be added to the NRB of £325,000 if the person and their estate meet the qualifying conditions.
The amount of the RNRB due for an estate will be the lower of:
- the value of the home, or the share that is passed to direct descendants, or
- the maximum additional threshold available for the estate when the person died.
Similar to the NRB, it is possible to transfer unused RNRB to a spouse or civil partner.
Add any RNRB from a late husband, wife or civil partner’s estate to the amount of the NRB due for an estate. This gives you the combined RNRB.
Take off the combined RNRB from the value of the estate first.
Next, take off the basic NRB (and any transferred basic NRB).
An example to illustrate the benefit of this latest change in IHT legislation
Bill and Clare are husband and wife and they have one daughter, Chloe. They own their main residence and some cash investments. Clare died on 1 March 2017 and left her entire estate to Bill. Bill died on 6 April 2017 and left his entire estate to his daughter, Chloe. As at the date of his death, the residence was valued at £650,000 and the investments were valued at £200,000.
The RNRB available to the estate will be the lower of £650,000 (value of home passed to direct descendants) and:
- Bill’s RNRB: £100,000
- RNRB transferred from Clare: £100,000
- Total: £200,000
- Bill’s estate: £850,000
- Combined RNRB: (£200,000)
- Total: £650,000
- NRB Bill: (£325,000)
- NRB transferred from Clare: (£325,000)
- Total: (£650,000)
- Amount chargeable to IHT: NIL
- IHT payable: NIL
This can be contrasted to the situation before the change in the IHT legislation.
If Bill had died on 1 April 2017, the situation would have been as follows :
- Bill’s estate: £850,000
- NRB Bill: (£325,000)
- NRB transferred from Clare (£325,000)
- Total: (£650,000)
- Amount chargeable to IHT: £200,000
- IHT at 40% on £200,000: £80,000
Marion dies on 1 December 2020 leaving a flat worth £100,000 and other assets worth £500,000 to her son.
The balance of her estate valued at £500,000 is left to her husband; this is exempt from inheritance tax due to the spouse exemption.
The maximum available RNRB in the tax year 2020/21 is £175,000.
The RNRB available to the estate is £100,000 being the lower of £100,000 and £175,000.
The IHT calculation is as follows :
- Chargeable estate (£500,000 to husband is exempt): £500,000
- RNRB: (£100,000)
- Total: £400,000
- NRB: (£325,000)
- Amount chargeable to IHT: £75,000
The maximum possible RNRB for this estate was £175,000, but the flat left to the son is only worth £100,000. So only £100,000 of the RNRB has been used. The amount which is unused (£75,000) is available to transfer to the husband’s estate. There is no unused NRB available to transfer.
The Downsizing Provisions: What is the IHT position when downsizing or selling a home to cover care fees?
It is increasingly common for the elderly to “downsize” either for practical domestic reasons or to fund care. The legislation does cater for these situations.
If a person dies after 5 April 2017 and has either disposed of their only residence on or after 8 July 2015 or downsized to a lower value property since that date, the downsizing provisions may apply. These provisions aim to restore some or all of the benefit of the lost residence nil rate band.
The downsizing provisions provide that, as long as both the downsized residence (if any) and other assets in the estate are inherited by children or grandchildren of the deceased, the estate will qualify for an additional amount of nil rate band. This will be broadly equal to the lower of the amount of the residence nil-rate band and the value of the other assets inherited by the children or grandchildren.
The precise rules differ depending on the facts of the situation and can actually be quite complex. For example, if the deceased sold his or her home and bought a new residence, the new residence must be left to children or grandchildren in addition to the other assets representing the funds realised as a consequence of the downsizing.
If, however, the deceased disposed of his or her home but did not acquire a new residence, it is necessary only to leave other assets representing the funds realised as a consequence of the downsizing to his or her children or grandchildren to qualify for the additional RNRB.
Overview of Inheritance tax
IHT is a tax paid on assets left when someone dies, after deducting the nil rate band and any other exemptions and reliefs have been applied.
IHT may also be applied to certain lifetime transfers including transfers to trusts and also to outright gifts in the seven years prior to death.
Gifts by a deceased which exceed the annual and other gift exemptions in the seven years preceding death are treated as part of the deceased’s estate on death for inheritance tax purposes.
Any tax due on the gifts is payable by the donee (the recipient of the gift). If the total value of the gifts does not exceed the NRB, no tax is payable on the gift. Tax is only payable on the value of gifts which exceed the NRB.
If a gift was made more than 3 calendar years before the date of death, a relief known as “taper relief” will be due. The amount of taper relief increases with the number of calendar years between the date of the gift and the date of death:
|Years between gift and death||Tax due|
|Fewer than 3||40%|
|3 to 4||32%|
|4 to 5||24%|
|5 to 6||16%|
|6 to 7||8%|
Most lifetime gifts are not immediately chargeable to inheritance tax, although they may become chargeable if the donor dies within seven years of making the gift.
However, there are two classes of transfer that attract inheritance tax if they, together with any similar transfers made within the preceding seven years, exceed the NRB at the time the transfer is made. These are known as Chargeable Lifetime Transfers (or “CLT’s”).
These transfers are subject to tax at 20% to the extent that they exceed the nil rate band. Neither the transferable NRB or the RNRB apply to lifetime transfers.
Reliefs such as Business Property Relief and Agricultural Property Relief (see below) and the annual exemption may reduce the amount of a chargeable lifetime transfer.
The two categories of gifts which are chargeable lifetime transfers are:
- transfers to most forms of trust; and
- transfers made through a close company in consequence of which there is a reduction in the value of the estate of an individual who is a participator in that close company.
Outright gifts to individuals are Potentially Exempt Transfers (or “PETs”) and will not trigger an immediate IHT charge, but can be brought within charge where the donor dies within seven years of the gift (subject to taper relief as mentioned above).
Once an individual has survived making a gift which is a PET by more than seven years, it is outside of their estate and has been effectively divested to their chosen beneficiaries without any IHT liability. This is a very simple method by which, with proactive planning, an individual can pass on their wealth in a very tax efficient manner.
We can advise on making the best use of the available lifetime IHT exemptions, which include:
- £3,000 annual exemption
- gifts from normal expenditure
- gifts in consideration of marriage (up to specified limits)
- gifts you make of up to £250 per person per annum
- gifts to charities
- gifts between spouses, facilitating equalisation of estates (special rules apply if one spouse is non-UK domiciled).
Whilst some of the exemptions may seem small in isolation, as part of a coherent strategy over a period of time they can add up to provide a tax saving which is not insubstantial.
There are also two potentially very valuable IHT reliefs which can be relevant if you own specific types of assets. The two reliefs are Business Property Relief (“BPR”) and Agricultural Property Relief (“APR”).
Business Property Relief
BPR offers up to 100% relief against inheritance tax on qualifying business assets.
You can get 100% Business Relief on:
- a business or interest in a business
- shares in an unlisted company
You can get 50% Business Relief on:
- shares controlling more than 50% of the voting rights in a listed company
- land, buildings or machinery owned by the deceased and used in a business they were a partner in or controlled
- land, buildings or machinery used in the business and held in a trust that it has the right to benefit from
You can only get relief if the deceased owned the business or asset for at least 2 years before they died.
Agricultural Property Relief (“APR”)
In an attempt to provide support to the farming industry, the government introduced a relief known as APR which provides that the gift/transfer of agricultural property shall be relieved of IHT at either 50% or 100%, depending on the circumstances at the time of the transfer.
APR is given on the ‘agricultural value’ as opposed to the market value of land. It is worth noting that the agricultural value is often lower than the market value of land. As such, you may find that even where APR is available the entire market value of the farmland may not be exempt from IHT.
Enterprise Tax Consultants can advise on inheritance tax
As experienced tax consultants, ETC provide inheritance tax planning advice to individuals, couples and families to reduce IHT liability while remaining HMRC compliant.
We can draw upon a range of estate protection measures to meet your inheritance goals and minimise tax liability.
One of the key objectives of IHT planning is to legitimately limit liability by for example maximising the amount your intended beneficiaries receive. We can achieve this through a combination of family trusts, gifts and wills to suit your circumstances.
We recommend reviewing your inheritance tax planning every two years, and following any significant life event such as births, marriages, separation and house purchases, to ensure your plans remain reflective of your wishes.
We also offer specialist expertise in working with families who are internationally mobile in their personal or business dealings.
We offer the following related services, among others:
Contact us for a no-obligation initial conversation about IHT planning with one of our chartered tax specialists.