Page 8 - Budget Newsletter 2021

Estate planners

Nil Rate Band

The nil rate band reached its current level of £325,000 in April 2009 and will remain at that level until 5 April 2026,
following the freeze announced in the Spring Budget. Had the nil rate band been increased in line with CPI inflation
since 2010, it would be about £430,000 from next April - £105,000 higher.

The frozen nil rate band drags more estates into the IHT net, an effect exacerbated by higher inflation. If your estate is
already potentially liable to IHT, the 2026 freeze could mean it will suffer more tax in the future if property and/or
investment values increase. Since April 2009, average UK house prices are up by over 60%, according to Nationwide,
and UK share prices have almost doubled (March 2009 marked their low point in the wake of the financial crisis).

Residence Nil Rate Band

The residence nil rate band (RNRB) came into effect on 6 April 2017 with an initial figure of £100,000. For 2021/22
through to 2025/26 inclusive, the RNRB is frozen at £175,000. The threshold above which the RNRB is subject to a 50%
taper reduction is also fixed until 5 April 2026, at £2,000,000, meaning it is lost altogether for estates valued at
£2,350,000 or more (£2,700,000 on second death for couples where the RNRB is unused on first death). While the
RNRB does help to ease the burden of IHT for many estates, it is by no means a panacea.

IHT Yearly Exemptions

The frozen nil rate bands make the yearly IHT exemptions all the more important:

• The £3,000 annual exemption. Any unused part of this exemption can be carried forward one tax year, but it must
then be used after the £3,000 exemption for that year. So, for example, if you made a gift of £1,000 covered by
the annual exemption in 2020/21, you can make gifts totalling £5,000 covered by the annual exemption in
2021/22 by 5 April 2022.

• The £250 small gifts exemption. You can make as many outright gifts of up to £250 per individual per tax year as
you wish free of IHT, provided that the recipient does not also receive any part of your £3,000 annual exempt
amount.

• The normal expenditure exemption. Any gift that you make is exempt from IHT if:
o it forms part of your normal expenditure; and
o taking one year with another it is made out of income; and
o it leaves you with sufficient income to maintain your usual standard of living.

Future Changes?

In July 2019, the OTS made a range of proposals to simplify some of the complexities of IHT. It had been expected (and
rumoured) that some of these would be taken up in the first Budget of 2020, but instead the Chancellor made no
mention of the tax. His silence in his first Budget of 2021 was followed shortly afterwards by an announcement of
some simplification of reporting from January 2022. Despite a third Budget with no major change, IHT reform might
still be on the agenda.

As is often the case with ‘simplification’, the OTS proposals would have created winners as well as losers. If IHT is a
concern to you, then it would be wise to seek advice on which category you might fall into.

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