Whilst Inheritance tax (IHT) will be slightly reduced for some from 6th April 2019, greater reforms may arrive soon.
From 6th April 2019, the Main Residence Nil-Rate Band (MRNRB) will increase to £150,000 per person. In theory, this means that a married couple or civil partnership can pass on up to £950,000; 2 x standard Nil-Rate Band (NRB) of £325,000 + 2 x MRNRB of £150,000 to their heirs, free of IHT.
However, in practice, matters are much more complicated, as eligibility for the MRNRB comes with a variety of conditions, primarily designed to limit the cost to HM Treasury.
A final increase to the MRNRB of £25,000 will apply from April 2020, increasing the total band to £175,000, per person, with a theoretical IHT-free estate up to £1 million per married couple/civil partnership. Thereafter, the MRNRB will increase in line with the Consumer Prices Index (CPI). However, there is some doubt whether this will happen at all, with the Chancellor having instructed a wider review of IHT from the Office of Tax Simplification (OTS) in January 2018.
The OTS Review
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 MRNRB, 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 option would be to increase the standard NRB and scrap the MRNRB 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 MRNRBs legislative complexity.
In the meantime, as the end of the tax year approaches, the regular IHT exemptions need to be considered. 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:
o made regularly - or where a clear pattern of gifting is established;
o made out of income; and, crucially
o do not reduce the standard of living for the person making the gift.
For more information on the exemptions and how they can be used, please do get in touch. As with most areas of finance and tax, the devil is in the detail and I would encourage you to contact LIFT should you have any questions.
The availability and value of tax reliefs depend on your individual circumstances.
Tax laws can change and the information contained herein is based on legislation at the time of writing.
The Financial Conduct Authority does not regulate tax advice.