In 2017, inheritance tax (IHT) is due a 123rd candle on its birthday cake. Death duties have been around since the 17th century, but IHT as we’d recognise today didn’t appear until the Finance Act 1894.
The law has remained far from static. Successive governments have tweaked IHT multiple times; it’s even seen two name changes since 1894. The tax celebrated its 90th birthday with a major facelift from the Inheritance Tax Act 1984.
We’ve seen some of the most significant updates to IHT in the past decade alone. That’s made it trickier than ever to stay on top of ever-evolving rules, which could see your estate needlessly paying more tax than required after you’re gone.
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 descendants.
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 new upcoming changes – can determine your 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 fact that the MRNRB tapers off 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 government froze the nil-rate band at £325,000 from 2008/09 onwards. Previously, it saw an increase every tax year between 1995/96 and 2008/09.
Sky-high UK house prices mean that £325,000 gets gobbled up fast, so more people than ever before are caught up in the IHT net. The situation provided much of the impetus for the introduction of the MRNRB to mitigate the additional tax burden caused by the frozen nil-rate band.
For richer, for richer: spousal exemptions
Delving a little further back into history, the MRNRB follows on from the transferrable nil-rate band. This 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. It’s well-known that transfers between two UK domiciled spouses or civil partners are IHT-free, but if that exemption is scrapped if half of the couple isn’t UK-domiciled.
Before the Finance Act 2013, the UK-domiciled half of the couple could only transfer £55,000 to their spouse before IHT took a bite out of their estate. That sum has been fixed since the 1980s. From the start of the 2013/14 tax year, this figure increased to £325,000. It now aligns with the nil-rate band and will rise alongside the nil-rate band going forward.
Non-dom conundrum: Meet Eric and Julia
So Eric, a UK-domiciled husband, still faces a cap (of £325,000) on what he can transfer to his non-domiciled wife, Julia, without having to pay IHT. But that figure is now far larger than it used to be.
However, from the start of the 2013/14 tax year, the Finance Act 2013 gives Julia another option. She can now 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. Electing to become UK domiciles lets Julia to enjoy the unlimited exemption on transfers between spouses that two UK domiciled spouses would receive.
The trade-off is that doing so makes Julia’s worldwide assets, including everything Eric left to her, subject to UK IHT when she dies. Julia can’t actively renounce her new IHT domicile, but it does lapse should she spend four consecutive tax years as a UK non-domicile.
IHT exemption expanded to emergency services personnel
It’s not always easy to stay awake through an entire Budget speech. The finer points slip by the best of us. One of the lesser discussed topics of the 2014 Budget – overshadowed by the promise of a new pound coin – was the extension of IHT exemptions to emergency services personnel.
Those serving in the armed forces are already exempt from IHT if they die during conflict or as a direct result of injuries sustained in conflict. The government has now extended this to emergency services personnel and government-backed humanitarian aid workers who die in similar circumstances.
Concurrently, the government also made medals and decorations such people have received 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. It shows how important it is to stay in the know. Otherwise, you might miss out on valuable exemptions and possibly pay more tax than strictly necessary.
The above are just a selection of the amendments the law has been through in less than a decade. The introduction of the MRNRB from the start of the 2017/18 tax year indicates that the government isn’t finished tinkering yet.