NOTE: This article was published in December 2018 and reflects the law as it stands on the date of publication and not at any later date. 

The paper can be downloaded as a PDF here.

4.1. Tapering

The deceased’s default allowance, i.e. the aggregate of his residential allowance and brought-forward allowance, is liable to be reduced if and to the extent that the value of the deceased’s estate exceeds the taper threshold (£2m until 2020/21, increasing thereafter in line with the CPI). For every £2 that the estate exceeds the taper threshold, there is a reduction of £1. The reduced default allowance is referred to as the adjusted allowance (IHTA 1984, s. 8D(4)(g)).

The RNRB is, therefore, nil in 2017-18 where the value of the estate exceeds £2.2m (disregarding the brought-forward allowance) or £2.4m (including the brought-forward allowance); and in 2020-21 where it exceeds £2.35m (disregarding the brought-forward allowance) and £2.7m (including the brought-forward allowance).

Brian, who was previously married to Trish, who died in 2010, dies in 2020-21 with an estate worth £2.1m. He is entitled to a residential enhancement of £175,000, plus a brought-forward allowance of £175,000.

Brian’s “default allowance” is, therefore, £350,000. However, the default allowance is liable to be reduced by £50,000, to produce an “adjusted allowance” of £300,000, as his estate exceeds £2m by £100,000. Having calculated the adjusted allowance, it is still necessary to determine the residence nil rate amount (see 7 below). This may be less than the adjusted allowance of £300,000 if, say, the value of the QRI which is closely inherited on Brian’s death is less than £300,000.

The brought-forward allowance will also be reduced if the value of the predeceasing spouse’s estate exceeded £2m (see 5.5 and 5.6 below).

4.2. Value of estate

The value of the estate, for the purposes of determining whether it exceeds the taper threshold (“TT”), is the value immediately before death of that person’s property for IHT purposes (“E”). E is defined to mean the value of the person’s estate immediately before the person’s death (IHTA 1984, s. 8D(5)(d)). A person’s estate is, generally, the aggregate of all the property to which a person is beneficially entitled (IHTA 1984, s. 5(1)). It is not the same as “VT”, i.e. the value transferred by the chargeable transfer under s. 4 on the person’s death (IHTA 1984, s. 8D(5)(e)) and so is not reduced by exemptions and reliefs which reduce the value transferred, or which render the transfer exempt. On that basis, E:

(a) includes property deemed to form part of the estate for IHT purposes, by virtue of a reservation of benefit, or by reason of the deceased having a beneficiary-taxed interest in possession;

(b) leaves out of account the value of any “excluded property” (IHTA 1984, s. 5(1)(b));

(c) is determined after the deduction of liabilities which reduce the value of the estate (IHTA 1984, s. 5(3));

(d) includes property qualifying for business property relief and/or agricultural property relief which reduce the value transferred;

(e) includes any part of the estate which passes by way of an exempt transfer; and

(f) excludes the value of failed PETs or chargeable transfers within 7 years of death, since property subject to such transfers is not part of the estate immediately before death.

The deceased’s estate includes assets of £3m, and liabilities of £200,000. There is a legacy of £100,000 to charity, and a specific gift of agricultural property worth £500,000 attracting 100% agricultural property relief.

The value of E is £3m – £200,000 = £2.8m. The value of the estate, therefore, exceeds the taper threshold of £2m. Indeed the RNRB will be nil.