As part of his 2021 budget, Chancellor Rishi Sunak announced a series of minor alterations to the rules regarding inheritance tax. Specifically, Sunak confirmed that the residence nil-rate band will be frozen temporarily, but how will the alterations set to come into place after April affect the average UK resident?
When a person dies, the total value of their estate is subject to taxation at the time it is passed on to their beneficiaries. This includes the cumulative value of their possessions, their property, and their savings. HM Revenue and Customs claims a share of the proceeds in the form of inheritance tax.
Outlined in this year’s budget, Mr Sunak confirmed a series of minor alterations to the inheritance tax system, which could result in some people paying more than in years gone by. Until now, the minimum threshold after which inheritance tax applies has stood at £325,000. This has meant that for a number of years, only those inheriting combined assets valued in excess of £325,000 have been required to pay inheritance tax.
This year’s big announcement regarding inheritance tax policy was the addition of a further £175,000 allowance, specifically for passing a home on to a child or grandchild. The full £325,000 original allowance still applies, though is now coupled with an additional allowance of £175,000.
This further £175,000 allowance, officially called the residence nil-rate band, effectively means that if an estate is allocated to a beneficiary who is a direct descendant of the deceased, no inheritance tax will be payable on the first £500,000 of its value. Many had expected this £175,000 allowance to be increased in accordance with inflation, but we now know it will stay at the same level.
In addition, some have criticised the government for failing to increase the standard inheritance tax threshold in more than a decade. The most recent increase occurred in April 2009, when the threshold was changed from £312,000 to the current £325,000. Critics argue that this fails to take inflation or rapidly elevating property prices into account, ultimately resulting in more beneficiaries than ever before facing an elevated inheritance tax.
Speaking on behalf of MoneySavingExpert, money editor Johanna Noble pointed out that what appears to be a positive announcement on the surface could actually result in more people finding themselves liable for inheritance tax.
The best thing to do is to make sure you have an up-to-date will, she added.
“While a freeze in inheritance tax may sound like a good thing, it means that in the long run, more people will pay it, and those who do will pay more,” she told Express.co.uk.
“This is because the value of assets such as homes, cash, and investments is likely to rise with inflation, as will wages, pushing some estates over the threshold when you’ll start paying tax and making more of the estate taxable.
“The most important thing to do is make sure you’ve got a will in place so your estate goes where you want it to. It’s also worth considering if you want to gift some money before you die, as some smaller gifts, including wedding and charity gifts, are exempt.
“However, if you have sizeable assets, it’s worth getting tax advice from a professional.”