| Position on 05/04/17 Article continues after advert | Position on 06/04/2017 | Position on 06/04/2018 |
Estate Value | £900,000 | £900,000 | £900,000 |
Standard Nil Rate Bands | £650,000 | £650,000 | £650,000 |
Residence Nil Rate Bands | £0 | £200,000 | £250,000 |
Chargeable Estate | £250,000 | £50,000 | £0 |
IHT Liability | £100,000 | £20,000 | £0 |
As the figures in table 1 show, Betty’s IHT liability reduces from £100,000 on the 5 of April 2017 to zero on the 6 April 2018. Of course what this example does not factor in is any potential growth in the value of Betty’s assets. This is where an IHT calculator, such as www.IHTcalculator.com, can provide assistance to financial planners.
This calculator enables a planner to input assumed growth rates for the value of the property, investments and cash. The calculator will then factor in the availability of the RNRB in order to show potential future IHT liabilities on the rising value of the estate.
For Betty, we have assumed a 5 per cent growth rate for her property and investments, and a 1% growth rate for her cash holdings. The calculator results are displayed in table 2.
Year | Estate Value | IHT Liability |
2017/18 | £900,000 | £20,000 |
2018/19 | £941,000 | £16,400 |
2019/20 | £984,010 | £13,604 |
2020/21 | £1,029,130 | £11,652 |
2021/22 | £1,076,465 | £30,586 |
2022/23 | £1,126,126 | £42,451 |
The figures in table 2 show that based on the introduction of the Residence Nil Rate Band (RNRB) on the 6 April 2017 is undoubtedly the most significant change we have seen to Inheritance Tax (IHT) legislation for almost a decade.
Many financial planners are only now getting to grips with the legislation and are considering how the RNRB will impact upon individual estates and IHT planning strategies.
The figures in table 2 show that based on the assumed growth rates, the IHT liability on Betty’s estate is not fully extinguished, and from 2021 the IHT liability starts to rise again quickly.
A planner may take a prudent approach to preserving Betty’s estate and factor in some growth in assets over time. The flexibility of BPR investments could prove of benefit in such planning as an IHT efficient investment of capital could help to future proof the estate from potential IHT liabilities resulting from asset value growth. The level of BPR investment can be increased or decreased in the future to take into account actual growth rates experienced.
If an estate is increasing in value due to unspent income, it could also prove advantageous to use the gifts out of normal expenditure exemption.
For large estates valued at over £2m, entitlement to the RNRB (and any transferable RNRB) will be tapered away by £1 for every £2 over £2m. The valuation is based on an individual’s estate immediately before death and includes all assets less liabilities. The valuation is performed before applying any exemptions or reliefs. This means that BPR qualifying shares will form part of the valued estate to determine whether the RNRB should be tapered.
There are, however, planning options that could make the use of BPR investments particularly attractive for high value estates. If you have a client that this may apply to, please do let us know as we can provide further case studies to aid you across a number of scenarios.
