Inheritance tax and siblings: proposed reform

The position of siblings under UK inheritance tax (IHT) law has again become a topical issue with respect to the tax regime during people’s lifetime and after death with the introduction of Lord Lexden’s Private Members Bill in the House of Lords earlier this year. Ultimately, the proposed Inheritance Tax Act 1984 (Amendment) (Siblings) Bill [HL] provides that, in certain circumstances, siblings could leave their estate free of IHT to the surviving sibling which differs from the current position whereby siblings may be left with large Inheritance tax bills, which has highlighted the need for change.

The current position

In several countries that still impose tax on death and during one’s lifetime there are forms of consanguinity relief, meaning that familial relationships such as siblings, nephews and nieces are exempt from IHT. This is in addition to the reliefs for spouses and civil partners whereby the rates of tax imposed are dependent on the relationship between the deceased and the recipients.

In the UK, the Inheritance Tax Act 1984 section 18 confirms that a transfer made to a surviving spouse (in 2005 amended to include civil partners) is exempt for IHT purposes. In other words, assets can pass between spouses and civil partners without being the subject of IHT. If the deceased is domiciled in the UK and the surviving spouse or civil partner is not, the exemption is limited to the standard nil rate band which is currently £325,000.00. The same exemption is afforded to couples who are divorcing or dissolving their partnership until the decree absolute or final order has been finalised.

Unlike many other countries, consanguinity relief is not afforded to siblings in the UK with the result that when siblings die, their whole estate in excess of the nil rate band is potentially liable to IHT at the rate of 40%. It is evident that the absence of such IHT relief that is afforded to spouses and civil partners may expose the estate of the deceased to IHT. Essentially this could mean the difference between paying large sums of IHT or none at all.

The proposed changes: sibling relief

The Inheritance Act 1984 (Amendment) (Siblings) Bill [HL] was introduced earlier this year by Lord Lexden to alleviate the IHT liabilities that are currently afforded to the estates of siblings upon death.

In order for a surviving sibling to benefit from this exemption, they must have attained the age of 30 before the date of the transfer of assets and resided in the same household as the transferor for a continuous period of seven years ending with the date of the death. For the purposes of this Bill, siblings are defined as sisters, brothers, half-sisters and half-brothers.

What to do in the meantime, pending reform

If Lord Lexden’s Bill is not enacted, there are estate planning methods which can be used to mitigate the amount of IHT paid on the deceased’s estate.

An example is considering current wills and putting wills in place that have IHT planning mechanisms incorporated into them, such as a discretionary trust naming the surviving sibling as one among a class of beneficiaries. The assets held in the trust would not be comprised within the estate of the survivor and therefore not taken into account for IHT purposes on their subsequent death.

There are of course other points of tax that may need to be considered during the lifetime of the surviving sibling(s) such as anniversary and exit charges for IHT and capital gains tax. However, a discretionary will trust is one example of how siblings can effectively reduce overall IHT liability and plan ahead for payment of tax on the death of the first sibling.