Low take up of nil-rate band for inheritance tax

A large house - nil-rate band for inheritance tax

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HM Revenue and Customs (HMRC) has reported a new record high for Inheritance Tax receipts received in 2017/18, coming in at around £5.2 billion.

However, the use of the nil-rate band is lower than expected.

This equates to a £400 million or an 8% year on year increase in the amount received in the 2016/17 tax year. This is despite the introduction in April 2018 of the main residence nil-rate band which, in certain circumstances, allows couples to pass on a family home worth up to £100,000 tax-free, in addition to the already available £650,000 combined nil-rate band.

The last eight years have seen inheritance tax receipts steadily increase, mainly as a result of the rapid rise in property prices (especially in London and the South East) that led to the introduction of the main residence nil-rate band. This residence nil-rate band is due to increase each year until 2020, when a couple will be able to bequest a home worth £1m without incurring tax.

However, this exemption is restrictive and very complicated. Indeed, a Freedom of Information request from financial advice firm NFU Mutual showed that as few as one in six estates have used the new nil-rate band exemption. HMRC data obtained via this FOI request shows that just over 3,000 taxpaying estates claimed the new residence nil-rate band between April and December 2017.

By any standards, this is a very low take-up of a theoretically valuable ‘exemption’. It may be that estates that did not claim the exemption were not eligible for the residence nil-rate band, or it might be that the personal representatives just did not know about it. This nil-rate band does not need to be claimed – according to HMRC, it is included automatically for all qualifying estates.

However, this only works if HMRC has enough detail through probate to know that it applies. If you have not had a professional assessment of the potential inheritance tax liability that could arise on your death, or considered methods of mitigating this, since the residence nil-rate band came into force in April 2017, then we would strongly recommend that you seek advice in this area.

The main nil-rate band of £325,000 per person has been frozen since 2009, so even modest growth in property or investment values will serve to increase inheritance tax liabilities.

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