As I highlighted in my previous article, the government’s tax take from inheritance tax (IHT) alone exceeded £5.2 billion in 2017/18, which is almost double what it was in 2010/11. The main reason for this increase is that since 6 April 2009, an individual’s IHT nil-rate band has been frozen at £325,000 whilst asset values continue to grow, which means a greater number of estates will be subject to IHT.
The introduction of the ‘residence nil-rate band’ on 6 April 2017 was intended to increase the reliefs available to estates, giving married couples and civil partners up to £1 million of relief when fully introduced. This should, therefore, ensure that HMRC’s IHT take does not continue to increase as significantly as it has done so in the previous tax years. However, individuals should not assume that they will obtain this relief automatically because there are some traps for the unwary.
The residence nil-rate band initially saw an additional £100,000 allowance being available to individuals against their family home or their previous family home if they had sold this previously and entered care. This relief is increasing from 2017/18 and is set to increase by £25,000 each year until 2020/21, when it will reach £175,000.
As with the IHT nil-rate band, the residence nil-rate band is also transferrable between spouses on death, and so by April 2020/21, spouses with estates valued at £1 million could be exempt from paying any IHT.
In order to benefit from the residence nil- rate band, there are a number of conditions which must be satisfied, including:
This means people without children will not benefit from the relief, even if they pass their family home to their nearest family members. Furthermore, where a deceased’s estate exceeds £2 million, the amount of residence nil-rate band is reduced by £1 of for every £2 it exceeds this amount. This might appear a high threshold, but if you own a business on death (which is exempt from IHT due to business reliefs), the value of this will be included when considering your overall estate.
The use of trusts within a deceased’s Will is often recommended, particularly from an asset protection point of view. However, incorrectly set up, these can also affect the availability of the relief.
The increase in the Government’s IHT take demonstrates that families are not planning ahead sufficiently to pass assets down to the next generation, but that can take a great deal of consideration, especially within a family business.
However, for individuals with estates over £2 million, it is worth undertaking a review of your estate sooner rather than later to ensure that you maximise all your available reliefs for the benefit of your family.