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Seek out advice on IHT strategy.

Gareth Davies Bond Dickinson IN April 2017 we will see the beginning of a significant change in Inheritance Tax (IHT), which could eventually save families as much as PS140,000.

Generally speaking, the way in which IHT currently works is that when the total value of a person's estate on death is above a threshold, known as the Nil Rate Band (NRB), the excess is usually taxed at 40%.

The NRB has been frozen at PS325,000 per person since 2009, although potentially any unused percentage on death could be transferred to a surviving spouse or civil partner (giving PS650,000 in total, depending on personal circumstances). However, the NRB is set to remain frozen until at least 2020/21.

So with increasing property prices plus growing savings and investments, more families could well find themselves caught in the IHT net. The good news is that some families could benefit from an extension to the static PS325,000 allowance, thanks to the introduction of a new Residence Nil Rate Band (R-NRB).

The R-NRB will be introduced at PS100,000 per eligible person in 2017/18, gradually rising (by PS25,000 per tax year) to PS175,000 by 2020/21.

This change relates back to the July 2015 Budget, when the then Chancellor George Osborne announced he would honour a manifesto promise, which he first talked about when Shadow Chancellor in 2007, to increase the IHT threshold to PS1m for families.

On the face of it the new allowance should, in time, do exactly that - ie each parent could have a PS325,000 NRB plus a PS175,000 R-NRB, so PS500,000 each and therefore a PS1m total for a married couple or civil partnership. However, as is often the case there is much detail to consider.

Technicalities may catch out the unwary and the unadvised. Examples of two pitfalls are as follows. Firstly, the new R-NRB is available when a qualifying residence passes to a direct descendent. This can include children, stepchildren and their lineal descendants, but not, for example, someone who leaves their home to say their brother or sister.

In addition, care will be needed when using trusts to deal with property because in certain scenarios the R-NRB could be unintentionally lost. Secondly, where a person's estate on death is above PS2m then the extra R-NRB could be tapered away.

Essentially the R-NRB could be reduced from PS100,000 to PS0 where the deceased's estate is worth PS2.2m or more in 2017/18. In 2020/21, when the R-NRB will have risen to PS175,000, it could be reduced to PS0 if the deceased's estate is worth PS2.35m or more.

There are many issues that will need to be carefully considered on a case-by-case basis, including for example where the value of a family home is below the R-NRB when part of the new allowance might then be unavailable. There are rules which can help those who may wish to downsize to a smaller home in later life, although this can be complex.

It is also worth pointing out that, much like the normal NRB, any unused R-NRB could also be transferable between spouses or civil partners on death.

For the R-NRB, this is irrespective of when the first person may have died and peculiarly it may not matter if residential property was not owned at the time of first death; the survivor could still benefit from a 100% R-NRB uplift on their subsequent death.

Putting in place a comprehensive and considered IHT strategy, which can be enacted over a number of years, can ensure that an estate is passed on in a taxefficient manner to your chosen beneficiaries. Consideration of the new R-NRB will be a key part of that jigsaw.

The correct solution will depend upon many things, such as personal circumstances, attitude to risk and objectives. In addition, the correct path may involve using a number of different allowances and planning opportunities to maximise results and balance risk.

Professional advice should always be sought before IHT planning is undertaken. We are here to help and take great pride in advising our clients in an experienced, objective, impartial and reliable way.


Gareth Davies
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Title Annotation:Features
Publication:The Journal (Newcastle, England)
Date:Oct 21, 2016
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