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Inheritance tax rules leave sister with half-a-million-pound bill

by Alison Griffiths



Published on 15th October 2018

The inheritance tax rules are under review, as we’ve mentioned in a previous blog, and the recent case of a sister being liable for a large inheritance tax bill emphasises the need for change.inheritance tax rules

Sisters Eileen and Norah Gillow always knew the death of one would land the other with a hefty inheritance tax (IHT) bill. Since they bought their two-bedroom Victorian flat in Belsize Park, north London, for £16,000 in 1973, its value had ballooned to more than £1.1m.

Indeed, the sisters were so concerned about the potential bill they even considered getting married, applying in 2015 for a civil partnership but being refused permission.

In 2016, 73-year-old Norah died, leaving her elder sister Eileen, now 80, with a near-£500,000 IHT bill from HM Revenue & Customs.

Why can’t siblings claim inheritance tax relief?

As the rules currently stand, people who are married or registered civil partners do not have to pay any inheritance tax on money or property left to them by their spouse. This rule does not apply to siblings, even those who have lived together for decades, as in the case of Norah and Eileen. It means Eileen was liable to 40% inheritance tax on everything Norah left above the threshold of £325,000 plus any additional entitlement under the Residents Nil Rate Band system.

Residents Nil Rate Band and inheritance tax rules

Under the current system, when someone dies and their estate is above the basic inheritance tax threshold (£325,000), the estate may be entitled to an additional threshold (Residence Nil Rate Band) before any inheritance tax becomes due.

The Residence Nil Rate Band goes up yearly:

  • £125,000 in 2018 to 2019
  • £150,000 in 2019 to 2020
  • £175,000 in 2020 to 2021 – this, added to the basic threshold of £325,000, is the equivalent of £500,000 per person, or £1 million for a married or civil partnership couple.

But the Residence Nil Rate Band is not straightforward and there are separate rules governing downsizing, moving into residential care, and second homes.

Chancellor Philip Hammond has asked the Office of Tax Simplification to review IHT. Let’s hope this review extends to looking at siblings and indeed other long-term cohabitees.

In the meantime, there are ways to mitigate the amount of inheritance tax paid on an estate by making plans during your lifetime. If you would like help with inheritance tax planning, or any other area of wills and probate, please get in touch with the team here at Optimum.

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