Data released by the government this summer has revealed that the money we pay in inheritance tax has risen for a fifth straight year. Whereas, in the 2009-10 financial year we paid £2,848 million in inheritance tax, the 2014-15 bill reached £3,825 million – representing an increase of over 34% in the period.
In light of this, the news that the government is phasing in an additional residential nil-rate band (RNRB) will have been welcomed by many. Prior to its introduction, the nil-rate band (or Inheritance Tax threshold (IHT)) – the value of an estate which can be passed on as inheritance which is not subject to tax – offered the principle tax exemption for non-charitable gifts provided by law. However, IHT has been frozen at £325,000 since 2010 although any unused allowance can be transferred to a surviving spouse leaving a maximum of £650,000 per couple which has either married or entered into a civil partnership. The soon-to-be-introduced RNRB, though, will allow for an additional £175,000 (£350,000 per couple) by 2020 following a phased implementation starting at £100,000 (£200,000 per couple) in 2017. When it is considered that inheritance tax currently stands at 40%, this measure could potentially reduce the tax liability of an estate to the value of £140,000 – not to be sniffed at!
However, the new RNRB is far more restrictive in its application than IHT. For example, amongst other things, it can only be applied to the passing of one residence to a direct descendent – a lineal relative such as a child or grandchild. Therefore, should an estate exceed the IHT band and the family home passed to a sibling with other assets going to lineal descendants, the measure will be inapplicable and the new nil-rate band be rendered redundant. So, although the RNRB will reduce the inheritance bill on many estates, there are likely to be many Wills which were drafted before its introduction whose resultant estates fail to fall within its sphere of application.
It would seem, therefore, that whether or not we will see a fall in inheritance tax paid in the future will very much depend on how people choose to draft their Wills and whether they wish to divide their estate in a manner which falls within the new regulation’s prescriptions. If they do, the reduction could be significant and a fall in inheritance tax paid could finally be imminent.
Should you wish to have a free 15 minute no obligation consultation to review your Will or, alternatively, discuss whether you wish for a Will to be drafted please contact our Market Harborough office on 01858 434 022 and ask to speak to Kate Godber.
If you found this article helpful we would recommend reading a previous post, ‘Who is Liable to actually pay Inheritance Tax if it is due?‘Talk to our legal team
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