Writing for Taxation magazine’s Readers’ Forum, BKL private client tax specialist Terry Jordan answers a query involving reducing the value of an estate via a will for inheritance tax (IHT) purposes.
The tax query
‘If the value of an estate is, say, £1,3m (which is mainly the value of a house in the south of the country), is it viable to state in a will that everything over £1m (the inheritance tax limit) is given to a hospice charity thus reducing the estate to just £1m and leaving no IHT payable?
Or does reducing the IHT to 36% ‘nonsense’ come into play?
There will be many people across the south in very ordinary family homes, with no excess income over expenditure, etc and who cannot use any of the other so-called ‘exemptions’. I have checked and double checked this fact.
What do Taxation readers think?’ Query 20,528 – Southerner.
Terry Jordan’s reply:
Excess over £1m should be given to charity in a will.
‘Southerner asserts that the inheritance tax limit is £1m. In 2007 George Osborne said that the Conservatives (who were then in opposition) would make the IHT nil rate band £1m and, anecdotally, that is supposed to have persuaded Gordon Brown not to call a general election that autumn. When David Cameron secured a majority in 2015, the residence nil rate band was introduced and is now in force at £175,000.
As with the ordinary nil rate band it is potentially transferable between spouses and civil partners except that, unlike the ordinary band, it tapers at £1 per £2 of value if either estate exceeds £2m in value net of debt but gross of, eg business property relief.
Accordingly, Southerner’s example would apply only to a widow(er)/surviving civil partner who had inherited both unused bands in full and who would leave direct descendants who could closely inherit part or all of a residence (or value of other assets if the ‘downsizing’ provisions applied).
It would be possible to provide in a will that the excess over £1m should be given to charity which would benefit from the charity exemption and in the circumstances above the rate of IHT on the remaining £1m would be nil.
The 36% ‘nonsense’ is the reduced rate with effect from 6 April 2012 on the remainder of either the whole estate or a component of it when a minimum of 10% is left to charity. In that case the calculation is after deducting available nil rate band(s) and HMRC has a handy calculator (inheritance tax reduced rate calculator: tinyurl.com/2etmpu3y).
Note that a component can benefit, not necessarily the whole estate. Under IHTA 1984, Sch 1A the components are the survivorship component; the settled property component; and the general component. Property caught by the gifts with reservation provisions is eligible to be merged with other components.
Finally, I understand that in its 2019 manifesto Labour undertook to abolish the residence band.’
The full article was published in Taxation magazine (issue 4988) and is available to subscribers here on the Taxation website.
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