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This publication is available at https://www.gov.uk/government/publications/inheritance-tax-nil-rate-band-and-residence-nil-rate-band-thresholds-from-6-april-2021/inheritance-tax-nil-rate-band-and-residence-nil-rate-band-thresholds-from-6-april-2021
1. Who is likely to be affected
This measure affects the estates of deceased persons and their personal representatives where the value of the estate exceeds the nil-rate band (NRB) and where the value of a qualifying residence exceeds the residence nil-rate band (RNRB). It also affects individuals who make lifetime chargeable transfers and trustees of relevant property trusts who are liable to periodic inheritance tax (IHT) and exit charges.
2. General description of the measure
This measure maintains the IHT thresholds at their 2020 to 2021 levels up to and including 2025 to 2026. This measure will maintain the:
- NRB at £325,000
- RNRB at £175,000
- RNRB taper, starting at £2 million
3. Policy objective
This measure maintains the tax-free thresholds and the RNRB taper available for IHT at their 2020 to 2021 levels up to and including 2025 to 2026. This means qualifying estates can continue to pass on up to £500,000 and the qualifying estate of a surviving spouse or civil partner can continue to pass on up to £1 million without an IHT liability. Maintaining these thresholds at their 2020 to 2021 levels is part of the fair and sustainable approach to rebuilding the public finances and continuing to fund excellent public services.
4. Background to the measure
This measure was announced at Budget 2021.
There are two nil-rate bands within IHT. Subject to available reliefs and exemptions, tax is payable to the extent the net value of the estate exceeds these nil-rate bands.
The £325,000 NRB is available to all in respect of their death estate and can be set against all assets. The NRB can also be used:
- to allow individuals to make lifetime chargeable transfers up to £325,000 within a 7-year period without an IHT liability
- in calculating the periodic and exit charges on relevant property trusts
The £175,000 RNRB is available to those passing on a qualifying residence on death to their direct descendants. A taper reduces the amount of the RNRB by £1 for every £2 that the net value of the estate is more than £2 million.
Any unused NRB or RNRB following the death of an individual can be transferred to their surviving spouse or civil partner. This means that from 6 April 2021, qualifying estates can continue to pass on up to £500,000 and if the NRB and RNRB remain unused, the qualifying estate of a surviving spouse or civil partner is still able pass on up to £1 million without an IHT liability.
The NRB has been maintained at £325,000 since 2009 to 2010.
The RNRB was introduced in 2017 to 2018, starting at £100,000 and increasing by £25,000 each year until reaching £175,000 in 2020 to 2021. The taper threshold has been set at £2 million since the RNRB was introduced.
The current legislation requires the NRB, RNRB and threshold for the RNRB taper to increase in line with the Consumer Prices Index (CPI) in each year from 2021 to 2022.
5. Detailed proposal
5.1 Operative date
The measure will take effect in relation to the tax years 2021 to 2022 up to and including 2025 to 2026 and will affect lifetime gifts made, relevant property trust charges arising and deaths occurring on or after 6 April 2021.
5.2 Current law
Section 7 of the Inheritance Tax Act 1984 (IHTA) provides for the rates of IHT to be as set out in the table in Schedule 1. The table states that the NRB is currently £325,000. Section 8 of the IHTA provides for the indexation of the NRB in line with CPI unless Parliament otherwise determines.
Section 10 Finance (No. 2) Act 2015 provides that section 8 of IHTA does not apply up to and including 2020 to 2021. This means that the NRB is maintained at the current level of £325,000 until the end of 2020 to 2021. Sections 8A-C of the IHTA provides that where an estate qualifies for the spouse or civil partner exemption, the unused proportion of the NRB when the first of the couple dies can be transferred to the estate of the surviving spouse or civil partner, so that the combined NRB can be up to £650,000.
Section 8D(5) of the IHTA provides the amount of the RNRB where the interest in a home passes on death to direct descendants. Section 8K of the IHTA provides for the definition of a direct descendant. The RNRB has increased from £100,000 for the tax year 2017 to 2018 to £175,000 for the tax year 2020 to 2021. Section 8D(5) of the IHTA outlines the “taper threshold” which reduces the amount of the RNRB by £1 for every £2 the net value of the estate is worth more than the £2 million taper threshold.
Section 8G of the IHTA provides that where the RNRB is not fully used, the unused proportion of the RNRB can be transferred to the estate of the surviving spouse or civil partner. The combined RNRB can be up to £350,000. Section 8D(6) and (7) of the IHTA provides for the indexation of the RNRB and taper threshold set out in section 8D(5) unless Parliament otherwise determines.
5.3 Proposed revisions
Legislation will be introduced in Finance Bill 2021 to maintain the NRB, RNRB, and RNRB taper threshold at their 2020 to 2021 levels until the end of 2025 to 2026. The legislation will disapply the indexation provisions in sections 8 and 8D of the IHTA.
6. Summary of impacts
6.1 Exchequer impact (£million)
|2020 to 2021||2021 to 2022||2022 to 2023||2023 to 2024||2024 to 2025||2025 to 2026|
6.2 Economic impact
This measure is not expected to have any significant macroeconomic impacts.
6.3 Impact on individuals, households and families
More than 94% of estates are still forecast to have no IHT liability in each of the next five years. This measure will impact an estimated total of 161,900 estates that are forecast to have an IHT liability over the next 5 years. This includes bringing a cumulative total of around 12,700 additional estates into IHT over this period compared to if the thresholds increased in line with CPI. It is expected that for those estates brought into IHT, the tax liability will be small in comparison to the value of the estate. Customer experience could be negatively impacted for those being brought into IHT if they are not already familiar with the process. To support individuals, HMRC provides clear guidance published on GOV.UK. This measure is not expected to have a material impact on family formation, stability or breakdown. The additional tax that some estates may have to pay compared to the thresholds increasing in line with the CPI will be small in relation to the value of the estate. Some individuals and families may be affected more than others, depending on their income and wealth levels and family circumstances.
6.4 Equalities impacts
HM Revenue and Customs (HMRC) collects data about the age, gender and marital status of the deceased. The impact of this measure on groups with protected characteristics is expected to be proportionate with the population of the estates of the deceased paying IHT each year.
IHT is mostly paid by the estates of individuals aged 75 or over. For example, in the tax year 2017 to 2018, almost 80% of taxpaying estates belonged to individuals aged 75 or over. IHT is also paid by the estates of more females than males each year. One reason for this is the combined total of marriages and civil partnerships in the UK are predominantly between individuals of an opposite sex. Men generally die at a younger age and those in a marriage or civil partnership will normally pass on all, or a large percentage, of the estate to their spouse or civil partner tax-free. The exemption for transfers between spouses and civil partners is also the reason only a small number of taxpaying estates belong to those married or in a civil partnership at death, with almost half belonging to those who had been widowed.
It is not anticipated that this measure will have impacts on other groups sharing protected characteristics.
6.5 Impact on business including civil society organisations
This measure is expected to have a negligible impact on advisers and relevant businesses. There is expected to be a negligible one-off cost to advisers and relevant businesses as they familiarise themselves with the change and update software to reflect the thresholds being maintained until 2025 to 2026. There are not expected to be any continuing costs.
Customer experience of advisers is expected to remain the same as this measure doesn’t alter how advisers interact with HMRC.
There is expected to be no impact on civil society organisations.
6.6 Operational impact (£million) (HMRC or other)
HMRC costs for this change are estimated to be in region of £3.5 million over the next 5 years. This is to cover increased staffing costs dealing with the additional estates brought into IHT. Other impacts have been considered and none have been identified.
7. Monitoring and evaluation
The measure will be monitored through information collected from IHT returns.
8. Further advice
If you have any questions about this change, please contact the Inheritance Tax Helpline on telephone: 0300 123 1072.