New Residence Nil Rate Band introduced April 2017
Here we go again! Another seemingly positive initiative from the government that needs to be treated with great caution. As is always the case in today’s environment you need to sort the wheat from the chaff. There is a trend here – a big tax giveaway (on the surface) accompanied by Treasury projections which show increased revenue for the government. Are we alone in wondering how such a thing could be possible?
What is happening is the government is giving with one hand, taking with the other. Or put it like this, it is lots of smoke and mirrors. So how can the government extend the Nil Rate Band from £375,000 to £500,000 – £1 million for couples – all at the same time as expecting more money from UK families in the future, via Inheritance Tax?
It’s because the rules take the benefit of the new allowance back from estates over £2 million (£2.7 million after the existing Nil Rate Band is factored in), the existing normal Nil Rate Band is frozen for many years to come (and has been for several years past) and the new allowance only applies to residential property left to direct descendants.
It’s really the frozen Nil Rate Band of £375,000 that has the big impact because this is the equivalent of a tax rise. Imagine your estate in 2010 was worth £750,000 and because of increasing property, share and other prices, your estate swelled to £1.5 million by 2020. The effect of the frozen £375,000 (£750,000 for a couple) means that the IHT liability, which was £40,000 in 2010 is now £340,000. That’s a tax increase of £300,000! If we add back in the new Residence Nil Rate Band, that scenario still sees a couple facing a £200,000 IHT liability. So a couple in 2010 who had a puny IHT liability could easily have a big liability in a short space of time.
This is why, despite the new allowance, HMRC are expecting more money than ever to come their way from Inheritance Tax payments.
The new allowance is far from straightforward in any event and what looks like a simple new rule if actually convoluted.
It is pretty much in any individual or couple’s hands to avoid this position, but this requires planning! They key at an individual level is to instigate estate planning measures and this potential liability can normally be eradicated.
But don’t be fooled, IHT is becoming a bigger and wider issue for more and more families, despite this new allowance.