Inheritance Tax  

Winners and losers of inheritance tax rule change

Winners and losers of inheritance tax rule change

Traditional family units with assets of less than £2m are the big winners of new inheritance tax exemptions introduced this month. 

The new residence nil rate band (RNRB) will offer £100,000 tax exemptions for the children of married couples or those within a civil partnership.

This £100,000 will increase by £25,000 each year to April 2020 when it will reach £175,000.

Combined with the nil rate band of £325,000, this will give a total of £1m of exemptions on inheritance tax for a couple's descendants.

However, the new tax exemption has drawn criticism for favouring traditional family units over others.

Rebecca Fisher, a partner at law firm Russell-Cooke, said: "The transferable element will not apply if you are unmarried or not in a civil partnership.

"This is to be contrasted with the wide category of ‘qualifying beneficiaries’ that includes spouses of descendants and children who were given up for adoption. Many suggest that the RNRB is politically motivated attempt to provide tax advantages in relation to the family unit."

The exemption will also favour those couples who have combined estates below £2m the most.

Ms Fisher said that for every £2 over £2m the RNRB is reduced by £1.

"That would mean that if your estate is £2m in 2017 to 2018 the RNRB is reduced to nil.

"The tax free sum rises to £175,000 in 2020 to 2021 and if your estate is over £2.35m then the RNRB will not be available."

Helen Howcroft, managing director of Equanimity IFA, said those seeking to take advantage of the residence nil rate band would need to give a higher priority to pension planning to stay within the £2m limit.

"This is because a pension, unlike other investments assets, is not subject to inheritance tax.

She said: "This works more even more in favour of leaving as much money in a pension as possible and drawing down on other capital first, because it could keep you within that £2m bracket."

Ms Howcroft was disappointed the full exemption had not come into play this year and saw it as a cynical ploy to enable the Conservative Party to honour its 2010 election pledge of having a £1m inheritance tax threshold, but delaying it as long as possible. 

A share of the home (or the proceeds if the home was sold after 8 July 2015) does not have to pass to descendants on first death but must do so on second death.