Could this increase inheritance tax allowance for your family?
It has been Government policy to allow “hard working families” to be able to pass on their properties to their children. The idea was to ensure that only the wealthiest families would pay inheritance tax (IHT) and the intention was to raise the IHT threshold to £1m.
The threshold at which IHT is paid is called the Nil Rate Band (NRB), currently worth £325,000 per individual. Married couples and civil partners can transfer one allowance (known as the transferable Nil Rate Band) to the other giving a combined allowance of £650,000.
The new Residence Nil Rate Band (RNRB) is worth £100,000 per person rising (from April 2018) by £25,000 from the next three successive tax years so that by April 2020 it will be some £175,000 per person. When added to the NRB of £325,000 equals £500,000. As with the NRB, the RNRB can be transferred from one spouse/civil partner to the other so that on the second death, £1m is available per couple.
When does the RNRB apply?
There are two preconditions for it to apply:
- You must have at least one lineal descendant; and
- You must have a residence that you have at some time lived in.
Lineal descendants include children, step children, adopted children, children who have been adopted out of the family, and foster children. A residence means a residential property and not commercial premises. It can be either a freehold or a leasehold property, but you must have lived in it at some stage. However, if you own two properties that you have occupied as a residence then only one can be used against the allowance even if it means that part of the allowance is unused.
Even if a spouse/civil partner died long before the RNRB came into existence a transferable RNRB is still available. Whilst that deceased spouse/civil partner may have used their main NRB, they cannot have used their RNRB and thus it is still available.
When does the RNRB not apply?
- If you don’t have either a residence or lineal descendants who are not the relevant beneficiaries of the residence.
- In addition, if your estate exceeds £2m, RNRB is progressively withdrawn by £1 for every £2 you are over. Estate is defined as assets less liabilities; the fact that you may hold business assets is irrelevant (although those business assets will probably be exempt from IHT for other reasons). Thus, from April 2020, if the estate exceeds £2,350,000 no RNRB will be available on the death of that taxpayer. A substantial gift made on your deathbed may secure the RNRB if it brings the estate below £2m notwithstanding that the gift has not been survived by the usual 7 years!
- If you sold your property before 9th July 2015 and did not replace it with another residence.
- If your child dies before you without children of their own and there are no other lineal descendants who inherit.
- If you fail to pass your residence on to either a spouse or civil partner before it then passes to your child or grandchild.
The RNRB is complex and produces some very odd results. If you want to take advantage of the only IHT allowance that is currently increasing then you need to review what you have done.
Most people are worth more dead than alive and thus it needs to be part of an overall strategy to look at what happens on your death. Much of London and the South East, along with other property hotspots around the country, will not be eligible due to the prices of their houses or will be eligible only if they take specific steps to secure it.
For more information on the RNRB and the impact of property and your existing Will please contact our Wills Trusts & Probate team.
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