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IHT changes are 'complicated and limited'

'What we have is not a £1m allowance for everyone… we have two inheritance tax nil-rate bands operating under two sets of rules'

14 December 2015

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The inheritance tax (IHT) additional nil-rate band granted to family homes is receiving widespread criticism for being too complicated and too limited in its scope.

The new additional nil-rate band comes into effect on 6 April 2017 and under the correct circumstances, will grant a £1m IHT nil-rate band that can be used to protect the family home from IHT.

'The main thing to point out to clients is that what we have is not a £1m allowance for everyone,' commented Elizabeth Urquhart Irvine, a private wealth solicitor at Pemberton Greenish.

'What we have now are two inheritance tax nil-rate bands operating under two sets of rules. The new relief is complicated and it is limited and the so-called downsizing rules that are so relevant to elderly clients are still not laid out in statute.'

Urquhart's criticism is not in isolation. Conservative MP, Andrew Tyrie, chair of the treasury select committee recently wrote to the chancellor, complaining that the policy change is so unfathomable that the only people who will benefit are professional advisers.

The think tank, Fabian Society, has recently gone further. Following a study into tax as a whole in the UK, the think tank concluded: 'Inheritance tax is too toxic to save and should be scrapped entirely. In its place gifts, bequests and other transfers should instead be taxed as income, at the recipient's marginal rate.'

The complications in the additional nil-rate band stem from the fact that first of all, a spouse has to die, allowing the surviving spouse to 'inherit' their nil-rate band of £325,000, which when combined with their own, gives the surviving spouse a £650,000 nil-rate band.

The additional nil-rate band begins at £100,000 per person in 2017, and will rise to a maximum of £175,000 in 2020.

Taken all together, having inherited their spouse's nil-rate band, their additional nil-rate band and then combined it with their own, a surviving spouse could have a £1m nil-rate band to use towards the family home.

However, there is an additional caveat. If the value of the entire state exceeds £2m, there will be a levy of £1 for every £2 that the estate exceeds the £2m mark.

Furthermore, there are restrictions regarding which beneficiaries can actually benefit from this convoluted allowance.

'The residence nil-rate band only applies on death (not to lifetime gifts of the family home) and only if you leave your home to direct descendants.

'Broadly, your direct descendants are your children and grandchildren. Step, adopted and foster children are included as are those for whom you are guardian, plus the spouse or civil partner of these.

Urquhart continued: 'So, if childless Aunt Gladys was to leave her house to her nephew Tom, then there would be no RNRB relief for her estate. Gladys's estate may still have all or some of the general nil-rate band but nothing else. That seems pretty unfair on childless aunts.'

She added: 'The emphasis is very much on married couples. Unmarried couples with children must either leave their own shares of the house to the children (which creates problems of its own) or lose their respective RNRB and they may not be aware of this without having obtained advice.'


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Tax & Wealth structuring