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.
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.
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.
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:
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.