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£1 million IHT Free is Largely a Pipe Dream

Posted: Friday, 4 January 2019 @ 13:43

The new residence nil rate band(RNRB) derive from the 2007 Conservative Party Conference where George Osborne announced plans to increase IHT tax free component to £1m.

At last, we are heading towards an Act of Parliament and now, we are looking at RNRB moving in at £100k in 2017/18 and rising to £175 ultimately in 2020/21.

Just some facts:

1.    Only a few people will inherit the holy grail of £1 million. There are lots of loops to pass through. 

2.     This tax reduction is being funded by freezing the nil rate band of £325k which has been frozen since April 2009. The nil rate band will remain frozen until the end of 2020/21. It is not that great from an IHT perspective and partly a case of Peter robbing to pay Paul.

3.     If you give property directly, great but overall gifts of property is limited. Few property settlements qualify. E.g Discretionary settlements do  not qualify even if all beneficiaries are of lineal descendants. A typical grandparental will settlement such as “for such as my grandchildren as reach 21” will not qualify because it is a relevant property trust.

4.    The RNRB is limited to one property but if an estate includes more than one property the executor can choose the property. A property that was never a residence but used as a buy to let will not qualify though can be qualify if used as a residence at one point. Some confusion, here.

5.    It can encourage bizarre behaviour. The tax benefit  is withdrawn by £1 for every £2 for the value of the estate which exceeds the threshold of £2m.   This can encourage people to make deathbed gifts to reduce the value of the estate. Spouses/civil partners may choose to prevent total estates reaching £2m.

​6. The meaning of closely inherited is wide. The residential interest can pass to a descendant including step-children and foster children. Spouses/civil partners of deceased decendants qualify provided they do not remarry.

7  It will encourages legal involvement particularly after death as people try to do deeds of variation to benefit from the tax. Overall this is good for specialist lawyers though they do have to master the legislation. The focus will involve tax planning post death.