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New Exemption, More Tax

New Exemption, More Tax

Official statistics have revealed that Inheritance tax receipts hit a record high of £5.2 billion in the last tax year, despite the introduction of the residence nil rate band. This was £400 million higher than the previous tax year.

HMRC data obtained through a freedom of information request has shown that as few as one in six IHT paying estates has claimed the new exemption.

What is the residence nil rate band? (RNRB)

This is a new exemption, introduced for deaths after 6 April 2017. Essentially, it is available where a person leaves their house to direct descendants. It was introduced at £100,000, increased to £125,000 on 6 April 2018 and will eventually be worth £175,000 after 6 April 2020. Estates above £2 million start to lose the exemption however, with £1 of the exemption lost for every £2 the estate is above £2 million.

It is available as an additional nil rate band on top of the usual nil rate band, which is currently £325,000, giving a maximum tax free sum currently of £450,000. Thereafter, IHT is payable at 40%.

The RNRB is transferable between spouses, in the same way as the nil rate band, giving a total exemption currently of up to £250,000 on the second death.

Why are so few estates claiming the RNRB?

The legislation is very complex. It is possible an estate may not qualify for the exemption for the following reasons:-

  • It does not contain a house;
  • The deceased had no children or did not leave their estate to their children;
  • The deceased’s estate was above £2 million;
  • The estate qualified but the executors failed to claim the exemption.

Why would executors fail to claim the RNRB?

As mentioned, this is a complex exemption and there are circumstances where it might not look like the RNRB is available, but in fact it is:-

  • The definition of ‘direct descendant’ is much wider than in other tax legislation and includes step-children, adopted children, foster children and children of whom the deceased was legal guardian.
  • The RNRB is available in some circumstances where the property was not actually included in the person’s estate at date of death, but was included for Inheritance tax purposes, such as some types of trust and gifts with reservation.
  • The exemption includes downsizing provision, where a person has sold or given away their home on or after 8 July 2015.

Is it possible to arrange estates so that the RNRB is available where it otherwise might not be?

In some circumstances, yes. There are options available to maximise the use of this exemption:-

  • Many spouses leave their estates to each other which aggregate the assets. This may mean on the second death the aggregated estate is above £2,000,000. Using the nil rate band and/or RNRB on the first death can solve this issue.
  • Some spouses might not be able to claim the RNRB, for example, if they are in a care home and have not occupied the house as a residence. In order to preserve their own RNRB the other spouse should ensure its use on their own death.
  • Lifetime giving, although aggregated with the estate for IHT purposes in the event of a death within 7 years, is not aggregated for the purposes of calculating the estate for the RNRB. So, reducing an estate to under £2m shortly before death is effective in terms of being able to claim the RNRB.
  • Consider how gifts to charity should be made. Charity exemption cannot be deducted on death in calculating whether the estate is under £2 million but gifts during lifetime may reduce the estate appropriately and the exemption may become available.

Technical drafting in a Will can be key to some of the actions noted above and some actions may potentially have other tax consequences including capital gains tax, income tax and land and buildings transaction tax as well as IHT. Taking expert advice is therefore key in claiming this exemption and ideally as soon as possible. With the exemption, once applied, currently being worth up to £100,000 in IHT and eventually £140,000, significant savings can be made.

By Claire E. Macpherson

Burness admin