By Simon Martin, Head of UK Technical Services at Utmost Wealth Solutions for International Adviser
Financial intermediaries supporting high-net-worth (HNW) clients will still be exploring the nuances of the 2024 Autumn Budget, especially the intricacies around Inheritance Tax (IHT) and the non-dom regime, says Simon Martin (pictured), Head of UK Technical Services at Utmost Wealth Solutions.
Whilst many have been focusing on the headline issues, there is one largely overlooked potential concern for wealthier estates buried in the details.
At the heart of this issue lies the Residence Nil Rate Band (RNRB), a measure introduced to reduce the IHT burden for those passing property to direct descendants, such as children or grandchildren.
While the RNRB has provided valuable relief for many since its introduction, changes in the 2024 Autumn Budget and economic trends suggest that it could begin to catch out some HNW clients.
The promise of a £1 million IHT threshold
The RNRB was introduced to help the previous Government fulfil its pledge of a £1 million IHT allowance for married couples and civil partners.
Readers will recall this was achieved by establishing an additional Nil Rate Band (NRB), the RNRB, that applied where certain conditions were met. The RNRB was originally set at £100,000, rising to £175,000 from 2020/21 and maintained at that level ever since.
In very simple terms, the RNRB creates an additional £175,000 worth of IHT allowance on death where a person’s estate includes an interest in a home that is then passed to direct descendants, such as children or grandchildren on death. This is doubled to £350,000 for couples given it can be transferred to a spouse or civil partner upon second death if not utilised on first death.
This £350,000, when added to the NRB of £325,000 per person, can also be transferred to a spouse or civil partner if not utilised on first death and thus increased to £650,000. This gave the target figure of £1,000,0000 and therefore achieved the Government’s promise.
Whilst the RNRB has often been criticised for being overly complex and perhaps unfair to those who have never owned property or had children, it has been instrumental in helping some families, especially those with properties with high home values, transfer wealth down generations and minimise IHT bills.
A frozen allowance amid rising wealth
While the £1 million threshold may sound generous, we need to remember that the NRB has remained at £325,000 since 2009 and the RNRB hasn’t increased in value since it was first raised to £175,000 from 6 April 2020. In the Autumn Budget 2024, the Chancellor, Rachel Reeves, announced that she was extending this freeze for a further two years until 5 April 2030.
At a time when property values and other asset classes continue to appreciate, the continued freeze of these bands is effectively a slow erosion of the allowance’s real value.
Moreover, alongside the freeze in threshold values, the RNRB is also subject to tapering for estates exceeding £2 million. Every £2 in excess of the £2 million threshold reduces the RNRB by £1. This taper threshold was set to rise each year by CPI from 2027/28 but was also frozen in the Autumn Budget until April 2030.
Consider a couple in the South of England, where property prices often exceed national averages and are expected to continue rising through the rest of the decade. Add investments as well as any other assets, and many estates are already hovering near or above the £2 million taper threshold and are likely to cross that limit over the coming years.
Furthermore, from 2027 the inclusion of unused pension pots and death benefits in estate calculations together with this continued freeze on the Nil Rate Bands will exacerbate the issue, pushing even more HNW clients over the £2 million limit and reducing their RNRB.
The implications for HNW clients
The implications of these changes are profound for HNW clients. Many may be unaware that their carefully planned estate strategies, previously considered below IHT thresholds, are now at risk of triggering additional IHT liabilities due to the continued erosion of these bands.
Those clients who have planned to use pensions as a tax-efficient way to preserve wealth for future generations will also need to reconsider their plans with their adviser. Across the board HNW families focused on leaving a legacy for their descendants may need to reassess their estate planning strategies as the tapering of the RNRB could significantly reduce the wealth that reaches the next generation.
A call to action
The Budget’s changes underscore the need for vigilant and forward-thinking estate planning. For financial intermediaries, this presents both a challenge and an opportunity to add value for HNW clients. By helping clients navigate these complexities, you can ensure that their wealth is preserved and passed on in line with their wishes, despite the expanding reach of the IHT net.
Strategies and structures such as lifetime gifting, increased spending before death and life assurance policies are all likely to come to the fore to protect assets and enable greater flexibility.
With the RNRB frozen and the £2 million threshold looming, the key is early intervention. The sooner clients understand their exposure and take action, the more options they’ll have to protect their estates.
For further information, please contact:
Temple Bar Advisory
Alex Child-Villiers / Sam Livingstone / Alistair de Kare-Silver / Juliette Packard
Tel: +44 (0)20 7183 1190 / Email: [email protected]
About Utmost Wealth Solutions
Utmost Wealth Solutions, part of Utmost Group plc, is a leading provider of insurance-based wealth solutions. On a proforma basis at HY 2024 following the acquisition of Lombard International Assurance Holdings Sarl, Utmost Wealth Solutions would have managed approximately £103bn of assets under administration.
Utmost Wealth Solutions offers outstanding service and focused expertise to its clients and their advisers who are seeking intelligent, efficient solutions to preserve their wealth and safeguard it for future generations.