Rachel Reeves is facing increasing pressure to abolish the £175,000 residence nil-rate band in her upcoming budget on October 30th, with calls mounting for a reform of the inheritance tax system.
The Resolution Foundation, a left-leaning think tank, has proposed that there is a “strong case” for scrapping the allowance, which has allowed homeowners to protect an additional £175,000 from inheritance tax since its introduction in 2017. The relief, which costs the Treasury around £2 billion annually, is seen by the foundation as a “complex and distortionary” measure.
Ms. Reeves, Labour’s Shadow Chancellor, has long criticised the tax breaks introduced by the Conservatives. In a 2011 article for The Guardian, she argued that the Conservatives were primarily benefiting the wealthy, rather than helping ordinary families. She highlighted that raising the inheritance tax threshold to £1 million for couples would likely impact only 0.04% of the population in England and Wales, while cuts to public services were being made elsewhere.
Currently, the residence nil-rate band allows individuals to shield up to £500,000 of their estate from inheritance tax, when combined with the £325,000 basic nil-rate band. For married couples, this can protect up to £1 million of wealth. Without the extra allowance, the threshold would drop to £650,000 for couples, leaving many families facing a 40% tax rate on anything above this level. For example, a couple with an £800,000 home and £200,000 in other assets could see a £140,000 inheritance tax bill if the relief is abolished.
Rising property prices have pushed more families into the inheritance tax net, with around 25,800 families benefiting from the relief in 2021-22, saving £2.6 billion on £6.5 billion worth of property. The prospect of the allowance being scrapped has raised concerns, particularly among middle-class families who have come to rely on it to manage inheritance tax burdens.
Aysha Marley from accountancy firm RSM noted that with the residence nil-rate band costing the Treasury nearly £1.8 billion in 2023-24, it could be on Reeves’ radar for reform. Tax experts have also argued that the relief is overly complicated and often misunderstood, particularly in cases where homeowners downsize or sell their properties to move into care.
Sean McCann of insurer NFU Mutual pointed out the complexity of the rules and said many people are unaware of the extra allowance, which could further incentivise its removal for simplification purposes.
The UK’s current 40% rate is among the highest in the OECD, and there have been suggestions to introduce lower rates of 20% and 30% for estates below £1.5 million, reserving the top 40% rate for the wealthiest estates.
The Institute for Fiscal Studies has also weighed in, recommending that the residence nil-rate band be abolished, but that the basic nil-rate band be extended to £500,000 to create a fairer system overall.
7 responses
The RNRB is also discriminatory; folk who wanted to have children who couldn’t but treat nieces, nephews, godchildren, etc as the next best thing don’t qualify.
I agree that the Residence Nil Rate Band is overly complicated and in desperate need of simplification, but with rising house prices, Rachel Reeves’ comment in 2011(some 13 years ago) that the Tories are primarily benefiting the wealthy is out of date and no longer applies.
I am based in the South West and for many of my clients, most of whom are just ordinary hard working people, their main asset is the family home with perhaps a little bit of hard won savings, but on paper they may look “wealthy” simply due to the value of their home.
Yes, reform or even get rid of a very cumbersome relief, but replace it with something simpler- perhaps as obvious as increasing the Standard Nil Rate Band which has remained static at £325,000 since April 2009 and so well behind increases in values over the last 14 years.
Make it £500k and no related to home ownership
90% chance in my view IHT will increase to 45p
I think that if this was brought in, it would be yet another attack on pensioners and their assets. Meaning more maybe subject to paying IHT and not being able to leave as much to their beneficiaries.
Inheritance tax is the cruellest of taxes. People work hard all their lives in the hope that they will leave their children a decent inheritance. The current NRB of £350,000 is too low when you consider property prices.
A person may be living a very austere life, but find their estate is targeted for IHT because of house values.
Cancelling the residents nil rate band will be an extremely unpopular policy,
There are so any ways to legally deal with Inheritance Tax in this country as you all know!
If any one has an IHT problem go and see an Independent Financial Adviser, pay a fee and plan for the future.
Sorry but honestly the Residential Nil Rate Band it is not that important.
The problem is everyone seems to know better than the qualified experts and want to do it themselves.
The children of the 90’s seem to think their parents are stupid and try to deter them from taking professional advice.
I am 76 and still a practicing Paralegal in Estate Planning and work with highly skilled IFAs.
I think a much fairer system would be to tax the beneficiary if they receive more than ‘x’ amount. It seems wrong that one person can inherit £1m in one family and pay no tax when another family that has say 5 beneficiaries each pay tax on say only a £250k inheritance each. The tax should not be a death tax but a tax on the amount each beneficiary gets.