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In 2017, inheritance tax (IHT) is due a 123rd candle on its birthday cake. Although death duties have existed in various forms since the 17th century, IHT as we would recognise it today wasn’t codified into a single piece of legislation until the Finance Act 1894.
The law has remained far from static; it’s even been through two name changes since 1894. IHT has been tweaked multiple times since its inception and celebrated its 90th birthday with a major facelift from the Inheritance Tax Act 1984.
Some of the most significant updates have occurred in the past decade alone. That’s made it trickier than ever to stay on top of ever-evolving rules and remain well-positioned to give your clients the advice they need.
Home is where the tax exemption is
IHT is notorious for its various exemptions and allowances; it’s got more loopholes than a bowl of spaghetti hoops. The most recent, the main residence nil-rate band (MRNRB), kicks in at the start of the 2017/18 tax year. It offers an additional allowance for family homes passed to direct descendents.
To save you from doing any extra sums, the new inheritance tax calculator including the main residence nil rate band from Drewberry – one of the first to take into account these upcoming changes – can determine your clients’ potential IHT liability for you. We’re already all dressed up for the MRNRB exemption and we’re just waiting for April so we have somewhere to go.
Also included in our sums is the four year staggered introduction of the MRNRB. Starting at £100,000, the MRNRB will rise by £25,000 each tax year until it’s worth £175,000 in 2020/21 (from then on it will increase by inflation). Not only that, but we’ve also taken into account the tapering of the MRNRB by £1 for every £2 a client’s estate is worth over £2 million. All in all, we’ve got you covered until April 2021.
Treasury one, estates nil
The MRNRB is the latest amendment to the nil-rate band, but it’s not the only one this side of the millennium. With the Treasury’s coffers looking decidedly empty following the financial crisis, the nil-rate band has been frozen at £325,000 since 2008/09. Previously, it had increased every tax year between 1995/96 and 2008/09.
Sky-high UK house prices mean that £325,000 gets gobbled up fast, so we’re faced with an ever-growing parade of clients across our desks who’ll attract an IHT liability after their death. The situation provided much of the impetus for the introduction of the MRNRB to mitigate the additional tax burden the frozen nil-rate band has caused.
For richer, for richer: spousal exemptions
Delving a little further back into history, the MRNRB has followed on from the transferrable nil-rate band, which was introduced in the Finance Act 2008. This inserted sections 8A-8C into the Inheritance Tax Act 1984, which allowed for the transfer of any unused nil-rate band from a deceased spouse to the surviving spouse, providing the survivor died on or after October 9, 2007.
And that’s not the only changes to the rules surrounding IHT and spouses. The Finance Act 2013 overhauled the legislation governing the treatment of non-domiciled spouses for IHT purposes, increasing the amount that could be transferred to them on death without an IHT bill being due. While IHT-free transfers between two UK domiciled spouses or civil partners are well-established, if half of the couple isn’t domiciled that exemption goes out the window.
Before the Finance Act 2013, the UK-domiciled half of the couple could only transfer £55,000 to their spouse before IHT would be charged, a sum that had been fixed since the 1980s. From the start of the 2013/14 tax year, this figure increased to £325,000 to align with the nil-rate band and will rise alongside the nil-rate band going forward.
So Julia, a non-domiciled wife, is still subject to a cap of £325,000 on what she can receive from her UK-domiciled husband, Eric, before Eric’s estate has to pay inheritance tax on the transfer. But that cap is far larger than it used to be.
The Finance Act 2013 gives Julia another option, however. Assuming Eric predeceases Julia after the start of the 2013/14 tax year, Julia can elect to become a UK domicile for IHT purposes (but still remain outside the UK’s tax regime for other taxes) from the date of Eric’s death. Doing so enables Julia to enjoy the unlimited exemption on transfers between spouses that two UK domiciled spouses would receive.
The trade-off is that, by becoming a UK domicile for IHT purposes, Julia’s worldwide assets, including everything Eric left to her, are up for grabs by HMRC when she dies. Julia can’t actively renounce her new IHT domicile, but it does lapse should she once again be classed as a UK non-domicile for four consecutive tax years.
IHT exemption expanded to emergency services personnel
It’s not always easy to stay awake through an entire Budget speech, so it’s easier to miss some of the finer points. One of the less-discussed topics of the 2014 Budget – overshadowed by corporation tax cuts, new ISAs and the promise of a new pound coin – was the extension of IHT exemptions to emergency services personnel.
Those serving in the armed forces already had an exemption from IHT if they died during conflict or as a direct result of injuries sustained in conflict. This has now been extended to emergency services personnel and government-backed humanitarian aid workers who die in similar circumstances.
Concurrently, the government also made medals and decorations received by such people for their work exempt from IHT, excluding these from the value of their estate.
Old dog, new tricks
IHT may be more than a century old, but that doesn’t mean it can’t be dynamic. The above are just a selection of the amendments the law has been through in less than a decade, and shows how important it is to stay in the know. The introduction of the MRNRB from the start of the 2017/18 tax year indicates that the government isn’t finished tinkering yet.