HM Insights

Proposed reform to Inheritance Tax would allow siblings to benefit from tax advantage

The Inheritance Tax (IHT) regime has been subject to various reforms in recent years and in recent weeks a Bill to amend the Inheritance Act 1984 had its first reading in the House of Lords.

The proposed change would enable transfers between siblings to be exempt in certain circumstances, bringing the IHT position more in line with the tax advantages afforded to married couples.

Inheritance-tax-word-wall-siblings-nil-rate-band-home-advantage-law-lawyer-scotland.jpg

What is Inheritance Tax?

IHT is a "wealth" tax and has been around since 1986. When someone dies leaving an estate exceeding the Nil Rate Band (NRB) then IHT will be charged on the surplus above the NRB at the rate of 40%. However, those in a marriage or civil partnership are given an absolute exemption for assets which pass from one spouse to the other either during life or on death.

This considerable tax advantage is not extended to any other familial or interdependent relationships, including siblings. Currently, individuals who leave the residue of their estate to their sibling are not given any form of relief and their assets will be taxed at 40% beyond the NRB. The NRB threshold stagnated in 2009, resulting in a regime which has failed to keep pace with inflation and rising property prices. Unfortunately, in some circumstances, a home may have to be sold to settle the IHT liability.

The Burden of Inheritance Tax

Joyce and Sybil Burden were unmarried sisters who fought for 30 years to highlight this issue, culminating in them applying to the European Court of Human Rights over a decade ago to seek the same IHT rights as a married couple and help them to avoid a potentially crippling IHT liability.

The sisters had lived together for over 30 years in a house built on land inherited from their parents. However, due to rising property prices, it was likely that the home would be worth more than the NRB on the first death, resulting in the surviving sibling having no choice but to sell.

The sisters sought to challenge the relevant provisions before the European Court of Human Rights and although the final judgement determined there had been no discrimination, there is no doubt the issues raised prompted reform to the tax system.

The new Bill

The Bill, if passed, will allow any brother, sister, half-sister or half-brother, over the age of 30 and who have lived in the same property continually for seven years up to the transfer of assets, to qualify for an exemption under the new rules.

The proposal will offer siblings some relief and can be seen as a welcome extension to the current IHT system. However, in practice it is likely to apply only in a relatively small number of occasions.

While it is a step forward in affording siblings similar rights as spouses on death, there is no discussion of siblings being offered the Transferable Nil Rate Band (TNRB). The TNRB enables spouses to make use of each other's NRB on the death of the survivor meaning that £650,000 of their joint estate can pass free of IHT. The proposed changes will only allow siblings to preserve the house and delay payment of IHT until the death of the survivor.

Will the changes matter to you?

If the Bill is passed and you find yourself in a position similar to Joyce and Sybil, please contact a member of our team to discuss potential estate planning options available to you to maximise the tax benefits available.

Our approachable team of solicitors have vast experience of estate planning and will be happy to discuss all of the available options to help you make suitable arrangements tailored to your families’ circumstances and complexities.

Useful Links

Personal taxation

MAKING A WILL