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A simple enough idea?

11th November 2020 | Alisha Francis

When George Osborne announced a promise at the Tory party conference in 2007 that a future Conservative government would raise the inheritance tax threshold to £1million, the idea seemed simple enough. In true political style, the promise was partially kept when in Summer 2015 it was announced that the Residence Nil Rate Band (RNRB) was being presented. However, fast forward ten years to when the policy was finally introduced in the Spring of 2017, the policy transpired to be a little more detailed than was initially believed. What George Osborne failed to mention in 2007 was that the allowance would only be in respect of property, therefore resulting in less generosity and more complexity.

As a result, what we have now is the standard inheritance tax nil rate band (NRB) of £325,000 per person, which is frozen until 6 April 2021 and the RNRB to help protect the main residence from IHT. The new allowance therefore will certainly see some people benefit from the long-anticipated increase in the sum of money that can be passed to loved ones free of a 40% inheritance tax hit.

The RNRB is to apply to transfers on deaths on or after 6 April 2017. The new threshold starts at £100,000 in 2017/18 and it then increases to £125,000 in 2018/19, £150,000 in 2019/20, before reaching £175,000 in 2020/21. The beauty of this allowance is that any unused RNRB is transferable to a surviving spouse’s estate, whether or not the first spouse to pass away could have used the RNRB (providing the surviving spouse owns or owned a house).

This allowance can be utilized provided only that those who are receiving the absolute gift of or interest in their home are “lineal descendants”. Of course, however, there is the essential requirement of owning a residence in one’s lifetime to be able to benefit from this allowance.

This is positive news for married couples and parents with children or grandchildren who have the ability to accept an interest in their residence, however limits on the availability of the new relief could potentially prove to be a problem. These problems will arise for those who have children/grandchildren who might not be capable of taking control of such a gift, perhaps where they are disabled or not to be trusted with money. 

This new allowance leads to the following question; are we introducing, through the back door, forced heirship rules? Scotland have these concepts in place and our continental friends are ‘au fait’ with such provisions but in England and Wales, we have always maintained freedom of testamentary disposition. Arguably, the RNRB takes part of this freedom away as the cost and route to acquire and secure this additional relief results in the lack of real choice as to who inherits part of your estate.

In addition, we have the underlying question of twofold discrimination; a strong assertion but a fact. Firstly, those who have never had or do not now have qualifying lineal descendants have no access to the RNRB. Those who have lost children, who have never been able to have them or indeed haven’t wanted them, cannot benefit. Also, those who are of the same-sex relationships without children – are they left without option to benefit?

Secondly, this new law affirms and ensures that only the very wealthy pay inheritance tax with financial consequences for those who leave an estate in excess of £2million.

Ultimately, whilst the RNRB could be seen as a good addition to our tax system, it may not be as generous as it first seemed. Above all, it can be viewed as being highly unfair as it excludes a percentage of the population from benefiting whilst leaving others with a lack of free choice on how they gift their estate.