The Chancellor announced that the nil rate band (£325,000) and residence nil rate band (£175,000) will remain at existing levels until April 2026.
What did the Chancellor say?
The Chancellor announced that both the nil rate band and residence nil rate will remain at existing levels until April 2026. The nil-rate band will continue at £325,000, the residence nil-rate band will remain at £175,000, and the residence nil-rate band taper threshold continues at £2 million. This means a single person maximising the nil rate bands can pass on up to £500,000 with no inheritance tax liability while a married couple or those in a civil partnership can pass on up to £1 million without an inheritance tax liability.
The Office for Budget Responsibility has forecast that the freeze on the nil rate bands will result in IHT receipts for the 2025/26 tax year of £6.6 billion (to put this in perspective receipts for the current tax year 2020/21 are forecast to be £5.2 billion).
What does it mean for Financial Planners?
The NRB has remained at £325k for an individual since the 2009/10 tax year. In that year the government received a relatively small amount of £2.3 billion from IHT. Even though the introduction of the residence nil rate band has (in some cases) allowed a married couple to pass on £1m to their beneficiaries, IHT receipts have continued to rise.
There was nothing in the budget which changes the basic IHT mitigation strategies, but it should act as a call to action in addressing your IHT liability sooner rather than later. While the nil rate bands remain at the same level, it doesn’t mean the value of individuals’ estates is going to do the same. If no action is taken more people will suffer IHT on their estates and those who currently have an IHT liability are likely to see this rise.
Even a modest 4% increase in a couple’s estate valued at £1m could result in additional tax payable of £16,000 after 1 year. In 5 years’ time (until the end of the nil rate band “freeze”) growth at this level means the same estate would be worth £1,216,653 which could result in a tax liability of £86,660.
The taper threshold of £2m is unaffected by the budget and for client’s whose assets exceed this limit, it’s well worth considering whether it’s possible to reduce the estate to regain the RNRB. The assets included in the estate for the purposes of the taper includes those to which a relief applies e.g. Business relief, but excludes gifts. The simplest way to regain your RNRB is to make gifts to reduce your estate assets below the threshold. While a failed gift made in the 7 years before death will still potentially impact the tax payable on your estate, it can still get you out of the taper and save IHT.
In order to minimise IHT on your estate and/or maximise the amount left to estate beneficiaries the main options for client’s with IHT liabilities continue to be:
Spend the money
Make outright gifts to individuals or trusts
Invest in tax wrappers which are outside the IHT “net” e.g. pensions
Invest in assets which attract relief e.g. Business Relief
Insure the tax liability
And as has always been the case, one of the best IHT planning tools available is a suitability drafted Will to ensure that full benefit is made of any NRB and RNRB available.