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Inheritance tax receipts rocket to record levels; will the RNRB make any difference

HMRC has recently released details of how much inheritance tax (IHT) they have collected and the total last year soared by 22%, to an all-time record level. Whilst some people are concerned about this, others are quite relaxed because they feel the introduction of the residence nil rate band (RNRB) next April will buck the trend.
But will it, long term? We look at the facts, starting with the current trend for IHT bills.

 

IHT receipts
Since 2009-10, the amount taken in IHT has increased on average by 12% each year and is now at the highest level since IHT was introduced in 1986. A lot of this increase is due to house prices (8.4% last year, according to the Halifax House Price Index), but also to the fact that the nil rate band has been unchanged since 2009 – and will continue to be frozen until 2021.


Some clients may have heard about the £1 million nil rate band and thought that was the end of their IHT problem. But that doesn’t come in fully until April 2020 and, at this rate, will be more than swept up by the increase in asset values. We discuss this further, below.


Putting assets outside their estate, in trust for example, will ensure that their IHT problem doesn’t get out of hand. These latest official statistics provide an excellent reason for you to contact clients and discuss their IHT position.


Are clients aware of IHT?
Although when you contact your clients, you may have to take some time telling them what their problem is all about. The Annual Canada Life IHT Survey 20161 reveals that more than 60% of UK adults aged over 45 with assets above the IHT threshold do not know that it is £325,000. And over half of respondents (52%) were not aware that IHT is levied at a rate of 40%. Perhaps most alarmingly, almost a quarter of respondents (24%) did not know that their family home is liable to IHT and 42% thought ISAs were not also liable.


But let us now return to the subject of rocketing IHT bills.

 

Transferable nil rate band
Firstly, let’s look at what happened when the transferable nil rate band was introduced on 9 October 2007, by Alistair Darling in the 2007 Pre-Budget Report. One major difference was that it was introduced immediately – presumably the complexity of the RNRB (and the downsizing provisions) meant that due deference had to be given to the wording of the legislation.


The estimated cost of introducing that provision was £1 billion in 2008-9, rising to £1.4 billion in 2010-11.2 As can be seen from the chart below, there was a severe immediate impact on the IHT received by the government, but this has been more than made up in recent years. On average, tax-paying estates now pay more IHT than before it was introduced.

 

IHT Tax Receipts Rocket to Record Level

So will the same thing happen after the introduction of the RNRB?

 

RNRB
Initially, an increase of just over 30% then 50% in 2020 sounds great. But it doesn’t even cover the average house value (source: Halifax House Price Index, August 20163) of £213,930 initially, as the RNRB will only be £200,000 for married couples and registered civil partners in the first year. And as can be seen above, the impact of asset growth cannot be underestimated; house prices grew by 8.4% over the last year, for example.

 

So how does the RNRB compare as regards cost to the Treasury? They estimate that the impact on receipts will be £270m in 2017/18 rising to £940m in 2020/21. (Source: HM Treasury4)

 

It is inevitable that the chart above will see another dip in future years, but if asset values (especially, house prices) continue rising it might not be too long until we are again back where we started. The fact that the standard nil rate band is frozen until 2021 will give force to this.

 

How will it impact clients in practice, so you can build it into your estate planning recommendations? Let’s look at an example.

 

Case study
Hubert and Cicely Morgan are a married couple living in a house worth £500,000. They have joint assets in addition worth another £500,000 so have a joint estate worth £1 million.

 

When news of the RNRB was announced in July 2015 they were delighted with the thought that when they died, their estate would go to their children without the taxman scooping up a large part of it.

 

However, their house is now worth £540,000 a year later and their total estate amounts to £1,060,000. Assuming 8% house price inflation and asset growth at the same rate continues, their future potential IHT bills are as below.

 

Year

House value

Total estate

Total NRB

IHT

2015

£500,000

£1,000,000

£650,000

£140,000

2016

£540,000

£1,060,000

£650,000

£164,000

2017

£583,200

£1,124,000

£850,000

£109,600

2018

£629,856

£1,192,288

£900,000

£116,915

2019

£680,244

£1,265,174

£950,000

£126,070

2020

£734,664

£1,342,990

£1,000,000

£137,196

2021

£793,437

£1,426,097

£1,020,000

£162,439

 

Conclusion
So although the RNRB brings in some saving in IHT, by the time it reaches its maximum level in 2020 it is entirely possible that because an estate has continued growing over the intervening four years, the impact is somewhat watered down.

 

In fact, using these assumptions, the IHT bill in 2020 will be virtually the same as when the RNRB was announced!

 

From 2021, both nil rate bands will be inflation-linked, so in the table we added 2% inflation in year 2021.

 

This demonstrates that getting assets out of the estate and into trust is something that should be seriously considered and not delayed.

 

1 Survey of 1,001 UK consumers aged 45 or over with total assets exceeding the individual inheritance tax threshold (nil rate band) of £325,000. carried out in September 2016. research conducted by Atomik.

 

2 Page 164 http://webarchive.nationalarchives.gov.uk/20100407010852/http:/www.hm-treasury.gov.uk/d/pbr_csr07_completereport_1546.pdf


3 http://static.halifax.co.uk/assets/pdf/mortgages/pdf/August-2016-Halifax-House-Price-index.pdf


4 page 9 https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/443195/Policy_costings_summer_budget_2015.pdf

 

 

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