Merge the inheritance tax nil rate band and residence nil rate band
Two railway lines merge into one

 

Summary 

Inheritance tax (IHT) could be both simplified and made fairer by merging two existing reliefs – the residential nil rate band (RNRB) and nil rate band (NRB) - into a single nil rate band. 

When the RNRB was introduced in 2017, it brought substantial complexity into the administration of IHT. The provisions are not clear or easy to understand. It creates distortions, as estates of equal value can now have different IHT liabilities depending on the value of residential property held by the deceased and whether or not they have children. 

As unused pension assets and death benefits become subject to IHT from April 2027, many more families will find themselves having to grapple with the complex provisions of the RNRB. A single, simpler, nil rate band would simplify the rules and reduce administration for taxpayers and their advisors, as well as HMRC. 

Detail

The NRB is available to all individuals and represents the amount of the estate that can be passed down on death without IHT applying (subject to any restrictions arising due to lifetime gifting). It is currently set at £325,000. 

The RNRB was introduced in April 2017 as part of a policy designed to make it easier to pass the family home down the generations. It can be claimed in addition to the NRB where the estate includes a residential property which is left to descendants of the deceased. 

Like the NRB, unused RNRB can be transferred to a surviving spouse. However, unlike the NRB it only applies on death and not to lifetime gifts. 

The RNRB is worth up to £175,000 - or the value of the qualifying property held in the estate if less. The RNRB is tapered (reduced) by £1 for every £2 that the total estate exceeds £2 million. 

For an estate to be able to claim RNRB against the value of residential property the residential property must have been the individual’s main residence at some point during their ownership and the property must be ‘closely inherited’ -i.e. it is left to the direct descendants of the deceased (including step, adopted and fostered children) and/or their spouses. 

Where a property has been sold during the lifetime of the deceased and the proceeds of the property are left to their descendants, the RNRB may still be available through ‘downsizing’ provisions. These complex provisions are needed to ensure individuals do not lose tax benefits if they need to sell a property to move into care or a less expensive property. 

The creation of the RNRB has introduced substantial complexity into the administration of IHT. The provisions are not clear or easy to understand. It also creates distortions, as two estates of equal value can have different IHT liabilities depending on the value of residential property held by the deceased and whether or not they have children who are inheriting that property. 

Solution 

Merging the RNRB into the NRB would make the IHT system simpler and fairer. 

There would be a cost to this measure, but it would also help to compensate for the fact that the NRB threshold of £325,000 has not increased since April 2009 – and is not due to increase until April 2031.