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Inheritance tax: Is it more circumlocution than simplification?

PUBLISHED: 15:39 01 March 2018 | UPDATED: 13:43 23 March 2018

Do your eyes glaze over when it comes to taxes, pensions and estate planning? You could be forgiven: change has been thick and fast in recent years, and the resulting regime is far from straightforward

Less than one year after the Government’s much trumpeted £1 million ‘inheritance tax free’ threshold for a married couple was introduced, the Chancellor, no less, has written to the Office of Tax Simplification (yes, it really does exist!) asking for a review of the over-complicated, and seemingly inaccessible regime, to be undertaken.

Until 2008 the ‘nil rate band’ – the portion of your estate which can be gifted away to anyone you choose without attracting inheritance tax – increased annually. It makes sense: today your £1 buys you less than it did yesterday so why should HMRC receive 40% of all that you’ve worked hard to achieve in your lifetime, above a stagnant threshold which is effectively decreasing in value year on year. The nil rate band has not moved since it was increased to £325,000 in April 2009. Something had to be done – house prices have risen (in the south east of the country in particular but not exclusively), meaning that inheritance tax has become a burden for executors of seemingly modest family estates.

An increase in the nil rate band was therefore long overdue and welcome. It is a shame that the regime introduced is so very convoluted and complex that it might have passed through Charles Dickens’ notorious Circumlocution Office. The result is an unnecessarily inaccessible, unfair and nonsensical ‘residence nil rate band’ rather than an increase to the tax free threshold that prevails for all equally.

As the name suggests, the residence nil rate band (presently £100,000, and rising in annual increments until it is £175,000 by 6 April 2020) must be applied to a residence. On the face of it, the rule is arguably fair if it is designed to recognise the rise in house values but that is where the sense stops: in order for your executors to apply this further tax free allowance to your estate you must be the owner of a residential property to the value of the allowance applied for. If you are a couple, dig out the HM Land Registry title certificate of your home and ensure that both names are on the title to secure your respective residence nil rate band entitlement. I have recently met with clients who believed their combined estates would qualify for the maximum £1 million by April 2020 but their matrimonial home was in one name only. A simple review and adjustment to the registered title now ensures both estates will qualify and a greater portion of their estates will pass to their beneficiaries instead of to HMRC. If you have downsized or sold up since 8 July 2015 (for example to receive care, or to live with family members) it can be applied, provided that you have kept a good record.

However, the residence nil rate band is only available if you are passing that portion of your estate to ‘lineal descendants’ (children and grandchildren) – this, too, takes planning. Aside from the blatant unfairness occasioned to anyone who does not have lineal descendants within the definition determined by the legislation, many couples who have not had cause to review their wills since 2007 will find that they contain a provision for the nil rate band to be held in a discretionary trust. This was good estate planning at the time but things have moved on and a discretionary trust, will not secure your use of the residence nil rate band (unless suitable advice and timely action is taken by your executors).

If that were not sufficient, should your estate qualify otherwise, the residence nil rate band will taper for every £1 that your estate is over the ceiling of £2 million. If you are a couple and the first deceased has an estate which is less than £1 million but the combined estates might exceed £2 million you might want to consider making use of the residence nil rate band on the occasion of the first death so as not to lose it when the estates are combined.

I am sure that the Government intended for the new regime to benefit the much touted ‘hard working families of middle England’ but since it is something of a minefield, this is the time to dig out your will for review.

For advice on the residence nil rate band and any other estate planning, succession or tax matters, please contact Caroline van Zyl on 01865 813643 or |


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