Inheritance Tax  

Advertorial: Death and taxes

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In and outs of liability mitigation

The most notable increase is observed in the £500,000 to £1m band, where the number of estates subject to IHT has increased from just over 7,500 in 2011/12 to around 9,000 by 2013/14.

To alleviate the pressure on middle income earners who – thanks to house price inflation – now find their properties are subject to IHT, the government announced the introduction of the Residence Nil Rate Band (RNRB).

Any deaths after 6 April 2017 will now be entitled to claim a RNRB of £100,000 in addition to the current NRB of £325,000, subject to various rules outlined below.

HMRC plans to increase the RNRB by £25,000 a year until 2020 after which point it will rise in line with the CPI measure of inflation (see table one).

Prior to this year, a £900,000 estate would have been subject to an IHT liability of £100,000. This year it fell to £20,000. Fast-forward to next year and, thanks to RNRB, the liability falls to zero.

The rules

However, the RNRB is not without stipulations. First and most importantly, the individual must own a home, or a share of one, which is included in the estate.

Next, the residence must be passed to a direct descendent - in other words children, step children or grandchildren.

Married couples leaving their assets to each other may transfer the RNRB to the surviving spouse allowing them to use up to twice the tax free amounts available to a single individual.

Unmarried couples and those in a civil partnership, or who have divorced are entitled to the RNRB individually but may not transfer unused RNRB to each other.

The value of the estate must not exceed more than £2m to qualify for the full RNRB. Once the estate passes this point, the RNRB will reduce by £1 for every £2 past £2m. The valuation is based on an individual’s estate immediately before death and includes all assets less their liabilities. The valuation is performed before applying any exemptions or reliefs.

The rules also make allowances for those who downsized their home before death but the RNRB is applicable only if the initial property would have been part of the deceased estate before it was sold.

There are further rules surrounding the RNRB and it is worth visiting to assist with calculating your client’s potential IHT liability as this takes into account both the taper threshold and the number of nil rate bands available. 

Planning in action

The importance of the RNRB to IHT planning is manifold. 

If the first deceased estate amounts to more than £2m, advisers should consider reducing the estate to take advantage of the full £100k allowance.