Inheritance Tax has caused concern and confusion in equal measure since its introduction in its current form in 1986, and you could argue that the concern is well placed. Current receipts indicate It has never been more lucrative for the Exchequer.
A nil rate band frozen at £325,000 since April 2009 combined with rising house prices has meant that a growing number of people are finding that an increasing proportion of their estate is being handed to the public purse, rather than being disbursed according to their wishes.
Many, therefore, breathed a considerable sigh of relief upon reading the headlines of a new ‘£1 Million Nil Rate Band’ to be introduced by the government from 6th April 2017, but do the details of the policy support the optimism of the headlines?
What is the MRNRB?
The new policy, known as the Main Residence Nil Rate Band (MRNRB) aims to help those middle-income families who have wandered into Inheritance Tax territory as a result of house price inflation. The scheme will, eventually, allow a generous £1 million of IHT allowance to couples, to use against any potential inheritance tax against their main property.
The MRNRB will be introduced on the 6th April 2017, and will apply to all deaths on or after that date. At launch it will offer an additional £100,000 in addition to the existing £325,000 allowance per person. The amount will rise with each tax year, with planned increases as follows:
- £125,000 for the tax year 2018/19
- £150,000 for the tax year 2019/20
- £175,000 for the tax year 2020/21
Whilst these measures are a very great improvement upon the current arrangements and are sure to help a large number of families at difficult times, there are, of course some considerable caveats.
Considerations to note
The first point to consider, and the clue here is in the name of the new proposals, is that the revised limits will only apply to family property; that is, only the ‘Main Residence’. Other assets such as cash, investments and second properties will continue to be assessed within the limits set down in 2009.
The next consideration is that these additional allowances of £100,000 per person (£200,000 for married couples and those in civil partnerships) can only be used when the main residential property is being passed on to direct descendants. That means only houses which will be inherited by children, step-children, foster children and their descendants will be eligible for this new rate. This has obvious implications for childless couples.
It should also be noted that whilst a surviving spouse can inherit the new Main Residence allowance, divorcees will return to the single person allowance.
Given the aim of alleviating pressure on middle-income families, there is an upper limit for on the value of estates eligible for the additional allowance. This will be set at £2.7 million, with estates worth more than £2 million receiving a tapering amount of allowance. For every £2 above £2 million, the additional allowance will be reduced by £1.
After April 2021 the value of the Main Residence Nil Rate Band allowance will be linked to the Consumer Prices Index and it is this connection that may, in the long-term signal conflict with the underlying aims of the new allowance.
The National Association of Estate Agents are currently predicting that house prices may rise by as much as 50% by 2025 and this would, once again, leave many within the reach of aggressive estate taxation and undo much of the good work of the intervening years.
If you would like to discusss this or any other matters to do with inheritance tax or your finances, please get in touch. Call 0845 8622 789 or email firstname.lastname@example.org