Posted by James McNeile, Partner
Should the inheritance tax nil rate band be increased?
This is the question that many are asking, particularly in London, as information recently obtained shows estates in London pay more inheritance tax than anywhere else in the UK.
Nil rate band
The maximum that can be passed on death to chargeable beneficiaries without incurring an inheritance tax charge (the nil rate band) is £325,000. The nil rate band has remained at £325,000 since 2009. Homes form the bulk of the value in most people’s estates. House prices have been on an upward trajectory for a long time now. London and the rest of the UK, have seen a large increase in property value yet the nil rate band has not increased for a long time, let alone kept up with property prices. This means that many families are paying inheritance tax on their estates now where they would not have done in 2009.
Given this, there are continuing calls on the Government to increase the nil rate band so that families do not have to sell their homes.
Main residence nil rate band
In 2017, the main residence nil rate band increase was introduced to help families who are faced with the prospect of selling the family home to pay the inheritance tax bill. Once fully in force in 2021, the nil rate band will increase by £175,000 to £500,000 where an estate includes a property that is the deceased’s main residence and it is left to their descendants. However where an estate is worth over £2 million the extra nil rate band will taper away until it is not available for estates worth over £2.35 million. It is worth remembering that spouses can transfer their unused nil rate band. The maximum nil rate band available on the second spouse to die could be £750,000 with an additional £250,000 main residence nil rate band.
Whilst the main residence nil rate band looks helpful, it is clear that it is overly complex and becomes increasingly redundant as house prices continue to push larger estates over £2.35 million.
Time for change?
There are calls from many quarters to review the nil rate band rate and increase it to take into account the increases in the value of property. Simplifying the inheritance tax regime, including getting rid of the main residence nil rate band and increasing the current nil rate band would also be welcomed. The Government’s response to the Office of Tax Simplification’s consultation, which we responded to, should be released any time now. We wait to see the Government’s response to the consultation or perhaps in next week’s Budget whether the nil rate band will be increased.
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