Case Study: Impact of the October 2024 Budget on IHT and RNRB
This case study examines the implications of the changes announced in the recent Budget for Mrs. Smith, a 70-year-old widow, and outlines strategies to mitigate her potential IHT liability.
Pre-Budget Scenario (Up to 5 April 2027)
Mrs. Smith’s estate includes the following assets:
- House: £1,000,000
- Deposits: £400,000
- ISA Portfolio: £500,000
- Personal Chattels: £100,000
- Total RNRB-Assessable Estate: £2,000,000
- Inherited SIPP (uncrystallised): £750,000
Her IHT allowances include two Nil Rate Band’s (NRB) and two RNRB’s, totalling £1,000,000. This reduces her IHT-assessable estate to £1,000,000, leaving an IHT liability of £400,000.
Post-Budget Scenario (From 6 April 2027)
Under the new rules, Mrs. Smith’s uncrystallised £750,000 SIPP will be included in her estate for both IHT and RNRB calculations. This increases her RNRB-assessable estate to £2,750,000, exceeding the £2 million RNRB taper threshold and eliminating both RNRB’s. Consequently, her IHT allowances drop to £650,000, increasing her net IHT-assessable estate to £2,100,000 and her IHT liability to £840,000—a catastrophic rise.
Mitigation Steps
Given her situation, Mrs. Smith can take proactive steps to significantly reduce her estate’s IHT liability and restore her RNRB. These strategies involve leveraging Flexible Reversionary Trusts and the “Gifts from Normal Expenditure” exemption.
Step 1: Draw SIPP and Gift Using Trusts
If Mrs. Smith’s husband passed away before age 75, she can withdraw the inherited SIPP tax-free. By systematically drawing down the SIPP and gifting the proceeds via a Flexible Reversionary Trust, she can:
- Use the “Gifts from Normal Expenditure” exemption to gift regular income drawn from the SIPP, which would be immediately IHT-exempt.
- Gift her NRB amount via a Flexible Reversionary Trust, ensuring it becomes IHT-free after seven years.
After Gifts and Trust Settlements:
Retained £100,000 in cash deposits as an immediately accessible ‘rainy day fund’.
Used £300,000 from cash deposits and encashed the £500,000 ISA Portfolio (tax-free) to populate the Loan Trust (£469,000) and Flexible Reversionary Trust (£331,000).
- House: £1,000,000
- Deposits: £100,000
- Loan Trust (outstanding loan): £469,000
- Flexible Reversionary Trust (NRB and Annual Gift Exemptions): £331,000
- Personal Chattels: £100,000
- Inherited SIPP (crystallised): £0
- Total RNRB-Assessable Estate: £1,669,000
- IHT Allowances (2 NRBs and 2 RNRBs): £1,000,000
Net IHT-Assessable Estate (after 7 years): £669,000, reducing the IHT liability to £267,600.
Step 2: Recycle NRB
Seven years after gifting her initial NRB into a Flexible Reversionary Trust, Mrs. Smith can recycle her NRB by partially recalling the loan from the Loan Trust and gifting it into a new Flexible Reversionary Trust. This ensures she maximizes her available allowances and continues reducing her estate’s taxable value.
No investment or house price growth has been factored into the above example, but they illustrate the point that from 6th April 2027 pensions will revert to being a vehicle to provide income in retirement and not an IHT-planning vehicle (as they have been used by many wealthy individuals).
Key Takeaways
- Start Early: Planning ahead of the 6 April 2027 deadline is crucial to mitigate IHT liability and preserve RNRBs.
- Leverage Trusts: Flexible Reversionary Trusts provide a structured way to reduce estate value while maintaining flexibility.
- Gifts from Normal Expenditure: Regular gifting of income ensures tax efficiency and preserves wealth intergenerationally.
- Recycle Allowances: Reusing NRBs through Trusts further reduces taxable estate value over time.
- Flexible Access: If Mrs Smith needs to supplement her retirement income or pay for care, the Trustees can revert money to her from her Flexible Reversionary Trusts. In addition, the Trustees can loan or appoint money to the Beneficiaries at any time.
Conclusion:
By leveraging Trusts and exemptions, Mrs. Smith can effectively restore her RNRB, reduce her estate’s IHT liability and secure her family’s financial future.