3rd May 2022
Nil Rate Band Allowance – Part 2
For a married/ civil partnership couple with children/ step children etc. and assets of £1,000,000, on the survivor’s death, no inheritance tax will be payable, because the value of the combined Nil Rate Band Allowances ( a double one in this instance) (‘NRB’) together with a double pair of Residential Nil Rate Band Allowances (‘RNRB’) set at £175,000 each amounts to £1,000,00, so there is no net estate liable to IHT by reason of the exemptions allowable in this instance.
But for each and every £1 in estate value over that figure, IHT on that and each successive £1 in value will be ordinarily chargeable at the rate of 40p in the pound. So, where the estate is inherited by adult children A and B, the first pound in value over and above the £1,000,000 threshold passes as to £0.40 to the UK Government in IHT payable , and each child receives £0.30 each.
Of course, that does not take into account the possible operation of either or both of Business Property Relief (‘BPR’) nor its close cousin, Agricultural Property Relief(‘APR’), a discussion as to the operation of which is outside the ambit of this article.
Not does it take into consideration the possible impact of either charitable legacies or the directing of a share of residue to UK exempt beneficiaries such as UK registered charities, nor indeed the IHT tax rate reduction that can be achieved if at least 10% by value of the estate passes to such exempt beneficiaries. Again, a discussion of that is outside the scope of this article.
What this article is going to discuss is the value ceiling, and what happens with estates with asset values in excess of that, and the way BPR and/or ARR asset values can have an unforeseen impact.
Where the survivor’s estate is say £2,150,000, instead of having a potential maximum threshold of allowances of £1,000,000, and the tax bill being £460,000, and the beneficiaries sharing £1,640,000 between themselves, the maximum threshold will be reduced on a £1 for £1 basis, where the value is in excess of £2,000,00, so will be £850,000 only. So, the tax bill in this instance will be £520,000, so the beneficiaries suffer an increased loss in the form of additional IHT which is payable of £80,000, so their entitlement post tax drops to £1,560,000.
For estates in excess of £2,350,000, there is no residential or transferable residential Nil Rate Band at all – one is down to the standard brace of ordinary Nil Rate Band Allowances. So, an estate say at £2,650,000 has Allowances of £650,000 only, and an estate liable to IHT of £2,000,000, with a resultant IHT bill of £800,000.
Now as solicitors our task is to interpret the law and to legitimately minimise future tax burdens, and so ‘comment’ is never appropriate.
What is possibly appropriate, is to suggest that for those with ‘large estates’ i.e. where this is likely to be an issue, then specialist advice should be sought during the couple’s lifetime ( or the survivor’s remaining time as a widow/widower) to see what, if anything, is both feasible and achievable by means of lifetime planning, which may either take the form of gifts ( which may or may not involve the use of trusts set up then), or the use of the placing of funds into appropriate financial product as advised upon by an appropriately qualified financial advisors, so as to which garner a positive IHT impact.
This is an area which is bespoke, in that every family’s circumstances and liking for thematic risk is truly an expression of their unique character; but what is clear is that a careful analysis must be made in each instances and solicitor and financial advisor must work together, often as complimentary advisors, in that neither set of professionals will have all of the answers and ought to be aware of the fact and be prepared to work for the client’s best interests. We do know of a number of such financial advisory firms and have experience of working with them. Should this be an area of interest and relevancy for you please contact our Edward Walter on firstname.lastname@example.org and 01892 520320