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Don’t rely on the Residence Nil Rate Band to offset IHT liabilities

From 2017-18 onwards, there is an additional transferrable main residence nil rate band of £100,000 (rising by £25,000 each year until 2020-21 and by CPI after that) available when a home is left to children or other direct descendants. This will eventually take the total IHT allowance of a couple to £1 million. What’s more, the nil-rate band, frozen since 2009, will increase in line with CPI in the 2021-2022 tax year.

This is undeniably good news for those looking to ensure that their wealth is passed to the next generation without a significant chunk being claimed by the tax-man. But, it doesn’t mean that the government’s IHT receipts are going to reduce, or even level off.

Inheritance tax receipts forecast

March 2018

Receipts are actually set to rise as a share of GDP by 2022-23. And the residence nil rate band from 2017/8 to 2020-21 will only partially offset the continued growth in asset prices. In the first three months of 2017/18, IHT receipts were strong, up 23% on a year earlier. While the OBR suggests a correction to the rates of 2016/17 later in the year, these figures remain striking, particularly since it states, “Since June 2010, IHT receipts have been systematically stronger than our forecasts.“

The many restrictions on the use of the residence nil rate band certainly contribute to its failure to halt the growth in IHT receipts. They include:

  • The maximum allowance is reduced for estates valued over £2 million. For every £2 of an estate over the £2 million threshold, the Residence Nil Rate Band will be reduced by £1. This means that for any individuals with estates over the value of £2.2 million in 2017/18, the Residence Nil Rate Band was reduced to zero.
  • The RNRB only applies to one residence that has been lived in at some stage during an individual’s lifetime. Any property that is owned but never lived in by the individual, such as a buy-to-let property, would not be eligible for the RNRB.
  • The residence must be left to a spouse or civil partner or direct descendants. These include the deceased’s children, grandchildren, remoter descendants, descendants spouses and civil partners, step children and adopted children. These do not include the deceased’s siblings, nephews and nieces. And if the deceased has no children or spouse when they die, the RNRB can not be used

So, it is perhaps not surprising that research from accountancy firm UHY Hacker Young suggests that the value of Business Relief (BR) is expected to rise 8% in 2017/18, from £655m in 2016/17 to over £700m in 2017/18. BR is attractive because BR qualifying assets, including investments in unquoted shares, with the potential to provide predictable, inflation-beating returns, offer 100% IHT mitigation.

For more information about how Oxford Capital’s Estate Planning Service utilises Business Relief to mitigate IHT, click here.

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