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Tony Wickenden: Don’t write off residence nil rate band just yet

The rise in IHT takings has prompted complaints around the new residence nil rate band’s impact

Tony WickendenInheritance tax receipts hit £5.2bn in 2017/18, illustrating just how important a contributor it is to the Treasury’s overall tax takings. The figure is perhaps unsurprising given the continued freezing of the nil rate band, increased property values and it being just the first year of the residence nil rate band at £100,000.

Even at that starter level (and with all of the conditions to be satisfied) the residence nil rate band would not have impacted much, if at all, on the reported yield. But I’ll touch on this in a little more detail later in this piece.

IHT raised during the year represented a new record and was up 8.1 per cent from the 2016/17 figure. The government’s IHT take has been on a relentless upward march since its low point of £2.4bn in 2009/10, when transferability of the nil rate band was kicking in and, coincidentally, it was frozen at £325,000.

In March 2017, the Office for Budget Responsibility projected 2017/18 IHT income of £5bn, noting “receipts have been revised up over the forecast period due to slightly higher equity and house prices”.  This figure rose to £5.3bn in the spring 2018 OBR projection and again to £5.4bn this tax year.

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The rise in IHT has already prompted some comments about the impact (or lack thereof) of the residence nil rate band, set at £100,000 in 2017/18.

However, as the OBR has noted, the majority of IHT receipts are received with a six- to 12-month lag, which means the majority of the 2017/18 IHT likely relates to deaths before 6 April 2017, when the residence nil rate band came into being. This needs to be considered carefully when assessing the impact of the residence nil rate band.

Rules are complex. The conditions as to who the residence can be given and the exclusion of gifts to discretionary trusts have a limiting effect on who can benefit

According to HM Revenue & Customs, there were more than 3,000 claims for the residence nil rate band in the period between April and December 2017, even though an estimated 24,000 estates paid IHT in 2017/18.

This only sounds bad news if you ignore the fact most of the IHT payments in April to December 2017 would have related to deaths that occurred in the pre- residence nil rate band era.

The fact the IHT take is forecast by the OBR to rise by only £100m in 2018/19 and £200m in 2019/20 shows the impact of the residence nil rate band working through.

The trajectory for this band is upwards. It currently stands at £125,000.  Next year it will be £150,000 and will cap off at £175,000 in 2020/21.  Combined with the ordinary nil rate band, this will mean the total taxed at a nil rate could be £500,000 for an individual and £1m for a couple.

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Many advisers will confirm the complexity of the residence nil rate band means it is not well understood by clients.

The conditions as to who the residence can be given and the exclusion of gifts to discretionary trusts have a limiting effect on who can benefit. The reduction of the residence nil rate band for estates more than £2m also acts as a limiter – especially since, in determining the £2m value, business property relief and agricultural property relief are ignored.

On this complexity point, it is worth noting the chancellor has instructed the Office of Tax Simplification to review how IHT works. Who knows what may emerge.

All in all, though, the residence nil rate band is helpful. Tax saving flowing from its availability in full will be £70,000, or £140,000 per couple. Its proportionate impact in the longer run will be determined by the values of all assets in an individual’s estate and, in particular, their main residence.

What is clear is that advisers need to be fully conversant with how it works and how to factor it into planning.

It is a must if you are serious about IHT and estate planning.

Tony Wickenden is joint managing director of Technical Connection. You can find him Tweeting @tecconn



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