Future increases to the residence nil rate band might be in question, thanks to the OTS review of inheritance tax.
Adrian Moy, Independent Financial Adviser and Inheritance Tax Planning specialist at Pembroke Financial Services of Shoreham explains “Inheritance tax (IHT) will be slightly reduced for some from 6 April 2019, but greater reforms may well arrive soon. The reduction comes from the IHT residence nil rate band (RNRB) increasing by £25,000, bringing it to £150,000 for the 2019/20 tax year. In theory that means a married couple can pass on up to £950,000 (2 x nil rate band of £325,000 + 2 x RNRB of £150,000) to their heirs free of tax.
In practice matters are much more complicated, as eligibility for the RNRB comes with a variety of conditions primarily designed to limit the cost to HM Treasury.
A final £25,000 increase in the RNRB happens in April 2020, increasing the available band to £175,000 and the theoretical IHT-exempt estate up to £1 million. There is some doubt, however, whether this will happen, at least as legislation currently envisages. The reason for that uncertainty is a review of IHT, which the Chancellor requested from the Office of Tax Simplification (OTS) in January 2018.”
The OTS review of inheritance tax
The first part of the OTS review was published last November. It detailed over 3,000 responses to their consultation and made a range of proposals for simplifying IHT administration.
The second part of the review, which examines the ‘key technical and design issues’ is due in spring. It would not be surprising if the OTS suggested some reform of the RNRB, which it said, “attracted a lot of comments… due to its complexity and because those who do not have children, or their own home, may not be covered by it”.
One obvious possibility would be to enlarge the nil rate band and scrap the RNRB, but as the OTS noted “any changes would of course involve an Exchequer cost”. Mr. Hammond’s predecessor turned down such a suggestion, despite heavy criticism of the RNRB’s legislative complexity.
Adrian further comments “In the meantime, as the end of the tax year approaches the regular IHT exemptions need to be considered and these are currently:
- £3,000 annual exemption for gifts;
- £250 per person small gifts exemption; and
- The normal expenditure exemption, which broadly speaking exempts any gifts that are:
- made regularly;
- made out of income; and
- do not reduce the standard of living of the person making the gift.
For more information on the exemptions and how they can be used, please talk to us. As with much else in IHT, the exemptions contain their own traps for the unwary.”
For specialist, professional advice on how to plan and mitigate Inheritance Tax and how to put in place a financial succession strategy, call Pembroke on 01273 774855 or email us by clicking here.
The value of tax reliefs depends on your individual circumstances. Tax laws can change. The Financial Conduct Authority does not regulate tax advice.