Page 8 - Budget 2021

Estate planners

Nil Rate Band

The nil rate band reached its current level of £325,000 in April 2009. From 6 April 2021 the 12-year freeze had been
due to come to an end. However, there was no thaw and the nil rate band will now stay at £325,000 until April 2026.
Had the nil rate band been increased in line with CPI inflation, it would be about £415,000 - £90,000 higher – in
2021/22.

To date a dozen years of frozen nil rate bands have dragged more estates into the IHT net and more will be added
over the next five years. If your estate is already potentially liable to IHT, the freeze could mean it will suffer more tax
in the future as inflation takes its toll. Since April 2009, average UK house prices are up by about 54% , according to
Nationwide, and UK share prices have risen by 80% (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 will remain at £175,000. The threshold above which the RNRB is subject to a
50% taper reduction will also be frozen for five years at £2,000,000, meaning it will be 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: after a pandemic-
induced dip, in the long term the government’s IHT tax take is expected to keep rising according to the OBR
projections.

IHT Yearly Exemptions

The continued freeze of the nil rate band makes 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 2019/20, you can make gifts totalling £5,000 covered by the annual exemption in
2020/21 by 5 April 2021.

• 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 Office of Tax Simplification (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 2021 Budget, but instead the
Chancellor made no mention of the tax. His silence on this occasion may be for the same Covid-19 focus as last year.

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