In the 2017/18 tax year some £5.2 billion was paid in inheritance tax (IHT). That’s £400 million more than in 2016/17 and the highest IHT ‘take’ on record.
On one level, this isn’t a surprise, the ‘nil rate band’ – the amount of an estate which is not subject to IHT – has been frozen at its current level of £325,000 since the 2009/2010 tax year while stock market investments and residential property have seen significant increases in the same period.
But the introduction of the ‘main residence nil-rate band’ in April 2017 was expected to reduce IHT overall. This ‘new’ relief served as an additional nil rate band of up to £100,000 (£40,000 reduction in IHT) where an estate exceeded the £325,000 nil rate band and the deceased’s main residence passed to a direct descendant (child, step child, adopted child and their lineal descendants). The allowance was capped at £100,000 or the net value of the residence, whichever is the lower. We’ve used the past tense as the main residence nil-rate band is currently set at £125,000 and will increase in stages to £175,000 for the 2020/21 tax year after which it will be linked to CPI. The allowance does taper downwards for estates of £2 million or more.
Like the main nil-rate band this residential nil-rate band can be transferred to a surviving spouse if not used by the first to die.
Given that the freeze on the main nil-rate band is now set to continue until the end of the 2020/21 tax year, the value of the main residence nil-rate band is considerable but it is a complex beast.
Continued freezing of the main nil-rate band suggests that, despite increases in the residential nil-rate band, IHT liabilities will continue to rise.
Philip Hammond has requested the Office of Tax Simplification to look into IHT to see if there are ways in which the process of assessing a potential liability, especially where gifts are made during lifetime, can be made more straightforward for tax payers. So we can expect some simplification even if that just makes it easier to calculate increased liabilities.