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Inheritance tax reductions ahead of potential reform

Inheritance tax (IHT) will be slightly reduced for some from 6 April 2019, but greater reforms may arrive soon.

The IHT residence nil rate band (RNRB) increases by £25,000, bringing it to £150,000 for the 2019/20 tax year. In theory that means a married couple can pass on up to £950,000 (2 x nil rate band of £325,000 + 2 x RNRB of £150,000) to their heirs free of tax.

In practice matters are much more complicated, as eligibility for the RNRB comes with a variety of conditions primarily designed to limit the cost to HM Treasury.

A final £25,000 increase in the RNRB happens in April 2020, increasing the available band to £175,000 and the theoretical IHT-exempt estate up to £1 million. There is some doubt, however, whether this will happen, at least as legislation currently envisages. The reason for that uncertainty is a review of IHT, which the Chancellor requested from the Office of Tax Simplification (OTS) in January 2018.

The OTS review of inheritance tax

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 RNRB, 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 possibility would be to enlarge the nil rate band and scrap the RNRB, 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 RNRB’s 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:

  • made regularly;

  • made out of income; and

  • do not reduce the standard of living of the person making the gift.

For more information on the exemptions and how they can be used, please talk to us. As with much else in IHT, the exemptions contain their own traps for the unwary.

Articles on this website are offered only for general informational and educational purposes. They are not offered as and do not constitute financial advice. You should not act or rely on any information contained in this website without first seeking advice from a professional. Past performance is not a guide to future performance and may not be repeated. Capital is at risk; investments and the income from them can fall as well as rise.

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