Abolishing the £175,000 residence nil-rate band (RNRB) is a possibility in the budget on 30th October. The government might also consider other amendments to the inheritance tax (IHT) system. 
House prices are going up but inheritance tax thresholds are unchanged so more families must pay.
The RNRB allowance protects an additional £175,000 from inheritance tax for qualifying homes left to direct family members. This is in addition to the first £325,000 of someone’s estate which is exempt from IHT. This extra relief costs the Treasury an estimated £2billion each year. 
 
The effect of the RNRB allowance is to increase an individual’s IHT-free allowance to £500,000 and a couple’s to £1million. In 2021/22 around 25,800 families benefited from the RNRB, saving £2.6billion on £6.5billion worth of property. 
 
However, increasing house prices mean more families find they must pay inheritance tax. The alternative argument is that RNRB benefits a small number of people while wider public services receive less funding. 
 

What would happen if the RNRB is abolished? 

The basic £325,000 nil rate band (NRB) will remain and pass on to a partner or spouse when someone dies. Without the RNRB allowance this means the IHT-free amount a couple can leave will go down from £1million to £650,000. Anything above this amount is subject to the 40% IHT rate. Abolishing the RNRB could mean the family of a couple whose estate is worth £1million would pay £140,000 in IHT. 
 

What else might change 

There’s no doubt there is confusion about how this allowance works, especially when homeowners downsize or sell their properties to pay for care. Simplification would help families dealing with a loved one’s estate. 
 
Currently 40% is the highest rate of inheritance tax across OECD countries. Some have suggested that lower rates of 20% and 30% should apply to estates below £1.5 million, with the 40% rate reserved for the most valuable estates. 
 
Some people who own businesses or have agricultural assets can currently receive 100% relief on IHT if they qualify. The budget might cap the IHT relief to £500,000 per person with 40% IHT payable above £500,000. Couples who jointly own the assets could share their allowances to make a total of £1 million. Alternatively, the budget might remove the allowance completely. Family-owned businesses or farms would need to make a succession plan to minimise IHT liabilities. However, many small family-run businesses could close as a result, leaving people unemployed. 
 

Steps you can take 

To reduce your IHT obligations you might consider setting up a trust or transferring property in advance. It’s important to take professional advice on the implications. You can pay into a pension scheme. Each year you have an allowance of tax free gifts you can use to reduce your estate’s value. However, it’s also important to consider care for yourself and your partner, if you have one, in later life. 
 
If you haven’t yet made your Will you can also think about including gifts to charity. To find out more give me a call. 
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