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Residence Nil Rate Band – new IHT allowance for families

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Rising house prices have meant that many of us might have ended up paying Inheritance Tax (IHT) when we die, but a new bit of tax legislation gives families a potential IHT-exemption boost, with a total possible IHT-free allowance of up to £1 million by 2021.

This is a piece of good news from HMRC that came into effect in April 2017.  But the new Residence Nil Rate Band only applies when the value of a property is passed on to children or grandchildren.  This is how it works…

 

Basic Nil Rate Band

Every individual has an IHT-exempt allowance of £325,000 which is called the Nil Rate Band.  That means if the value of your estate on your death is worth more than that, you will pay IHT at 40% on the excess.  There’s no IHT on anything you leave to your spouse or civil partner.  So far, so simple…

 

Combined Nil Rate Band

If your spouse or civil partner hasn’t used all their Nil Rate Band – such as if they’ve left everything to you – then their unused Nil Rate Band is transferred to you, giving you a potential Nil Rate Band on your death of up to £650,000.  But if they’ve used some of it in other legacies, then you won’t get it all – only the unused bit.

 

Residence Nil Rate Band (RNRB)

This is the new element:  if you own your home and have children and/or grandchildren, you can benefit from the RNRB.  It adds an extra chunk of Nil Rate Band to the basic allowance.  The amount of RNRB that you can be allocated depends on a couple of factors:

  • The value of your home – you can’t be allocated more than its value
  • When you (or your spouse/civil partner – see below) die

 

The RNRB came into effect in April 2017 and the maximum allowance amount is being increased over the next 3 tax years.

 

Tax Year Maximum RNRB
2017/18 £100,000
2018/19 £125,000
2019/20 £150,000
2020/21 £175,000

But it’s important to note that if your estate is worth more than £2 million, the amount of RNRB will be reduced.   We explain this in more detail a little later…

 

Combined RNRB

The good news is that – like the basic Nil Rate Band – any unused RNRB can be passed to a spouse or civil partner, meaning that the surviving partner can have an estate of up to £1 million IHT-free if he or she dies in the 2020/21 tax year.  This is made up of:

 

Individual’s own Nil Rate Band  –  £325,000
Spouse’s Transferred Nil Rate Band  –  £325,000
Individual’s own RNRB  –  £175,000
Spouse’s Transferred RNRB  –  £175,000
____________________________________
Total Nil Rate Band  –  £1,000,000

 

It doesn’t matter when the first partner dies (or indeed if they are already deceased), the second partner will benefit from a transferred RNRB on his or her death.

 

It’s only for families

The rules for this new allowance say that you can only get it if you are passing the value of your home to your “lineal descendants” – so children and grandchildren.  If you have adopted children, step-children or foster children, they count as direct descendants so can benefit from the allowance.

 

But it’s complicated…

The rules are pretty complex:  they take account, for example, of cases where you’ve downsized or sold your property (perhaps to go into care) provided that happened after 8 July 2015.  They also allow for the executors to sell the property and split the proceeds if that’s appropriate.

There are special rules too for putting your property into a trust – and in some cases this can mean you lose your RNRB so it’s critical you take advice before doing so.

 

Estates over £2 million

You don’t have to be a Premier League footballer or a pop star these days to have a total pot of assets worth more than £2 million. So if this applies to you, read on…

If your estate is worth more than £2 million on your death, then your RNRB will be reduced by £1 for every £2 of value in your estate.  What that means in practice is that if you died in the 2017/18 tax year you’d get no RNRB if your estate is worth more than £2.2 million, rising to £2.35 million in 2020/21.

Reducing the value of your estate to below the £2 million threshold will ensure you get your RNRB entitlement.  It’s not rocket science:  it can be achieved through good planning.

 

You can do something about the value of your estate

Here at 1825, we challenge the famous saying by Benjamin Franklin that the only two certainties in life are death and taxes.  When it comes to IHT, tax doesn’t have to be a certainty.

We can’t stress enough how important it can be to plan ahead to keep any IHT due as low as possible with planning that maximises the use of exemptions, reliefs and allowances.  You can use a variety of measures to reduce the value of your estate.  These might include:

  • Gifts using IHT exempt gift allowances
  • Putting assets into certain types of trust

 

My message today is simple:  don’t sit back and allow the taxman to take a larger slice of your family’s inheritance than is absolutely necessary.  Plan carefully to ensure you use all the permitted allowances and exemptions to manage the size of your estate.

Changes to rules about IHT means that it’s important to keep reviewing your estate planning.   Talk to our specialist estate planners at 1825 Private Client Services to make sure that your plan is still effective and takes the RNRB into account:

Call charges will vary. We’re open Monday-Friday 9am-5pm.

 

This blog and any responses to comments should not be regarded as financial advice. Laws and tax rules may change in the future. The information here is based on our understanding in June 2017.

 

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