Published on: 12th July 2021

Do We Have a Broken Inheritance Tax System?

The current Inheritance Tax (IHT) system in the UK is regularly viewed as complex and unfair. In its current state, a deceased’s estate is taxed at 40% for everything that is above the value of the Nil Rate Band (NRB). The current NRB is £325,000 and will remain fixed at this rate until April 2026. The NRB has remained at this rate since 2009 - that is 17 years at a fixed rate. In the previous 17 years (1992-2009), the NRB increased from £150,000 to the current £325,000.

A new addition to the already complex IHT system came in 2017 with the Residential Nil Rate Band (RNRB). This added an additional amount that could be passed on tax-free against the value of a family home. The current value of the RNRB is £175,000. To qualify for this, however, you must pass the property to your direct descendants (ie your children or grandchildren). Additionally, you cannot use a discretionary trust to pass on the property.

Both the NRB and RNRB can be passed to your surviving spouse or civil partner. This makes the total tax-free value £1 million for a married couple / civil partners who pass their home to their children / grandchildren. These family based criteria have led to individuals viewing the system as unfair toward those who do not have a traditional family.

Additionally, the Office for National Statistics has shown that the effective IHT rate for estates over £7 million is in the region of 10% after reliefs and exemptions are applied. For people with lower value estates paying the full IHT rates, this again is deemed unfair.

Published in January 2020, a report from the All-Party Parliamentary Group on Inheritance & Intergenerational Fairness recommends an overhaul of the UK IHT system. The core points that the report makes are that the IHT should be reduced to 10% for estates worth less than £2 million and 20% for estates over £2 million. This publication is far from becoming law, but shows acknowledgement from people within government that our current system is too complex.

At Casey & Associates, we can help you navigate your estate planning and maximise your IHT allowances. If IHT confuses or concerns you and you would like to start Estate Planning, give our friendly and experienced team a call on 01732 868190 or fill in the contact form on our website.

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