The Conservative Party have long promised to increase the threshold for Inheritance Tax (IHT) and indeed have announced that the nil rate band for a married couple will rise to £1 million come the tax year 2020/21. But is it really as a good as it sounds?
Under the right circumstances you could save up to £140,000 in IHT when your family home passes to your children on the second death.
The new IHT Residence Nil Rate Band (RNRB) will begin to be introduced with effect from April 2017. And it will be in addition to an individual’s own nil rate band of £325,000 (So married couple currently benefit from a total nil rate allowance of £650,000).
However, it is conditional on your main residence being passed down to direct descendants. For example, your children or grandchildren.
So by 2020/21 you could avoid IHT on up to £1M of your wealth. Each parent will have a nil-rate band of £325,000 plus a RNRB of up to £175,000.
Contact Martin Dodd on 01902 742221 or email him at [email protected] if you would like talk about money issues.
There are 8 key facts that you need to understand to be able to benefit from the increase allowance
- How will the additional RNRB increase from April 2017?
The RNRB will not be introduced until April 2017 and will be phased in over 4 years starting with an increase of £100,000. The full £175,000 allowance will not be available until April 2020. From April 2018 the allowance will increase by £25,000 each tax year until 2020.
| Maximum residence nil rate band | |
| 2017-18 | £100,000 |
| 2018-19 | £125,000 |
| 2019-20 | £150,000 |
| 2020-21 | £175,000 |
Of course these are the maximum amounts. The available allowance will be reduced if the value of the property is less than this.
For example, you die in 2020/21 and your will gifts your 50% share in the family home to your children. If this share is valued at £150,000, the extra £25,000 of nil rate band will go unused (but may be transferred to your widow).
2. When the RNRB can be transferred?
The RNRB will be transferable between spouses and civil partners on death, much like the standard nil rate band. It is the unused percentage of the RNRB from the estate of the first to die which can be claimed on the second death.
This is irrespective of when the first death occurred or whether they owned residential property at their death. There will always be an additional 100% RNRB unless your estate was greater than £2 million.
3. Tapering the residence nil rate band
People with large estates may not see any benefit from the extra nil rate band. The residence nil rate band will be reduced by £1 for every £2 that the deceased’s net estate exceeds £2 million.
This will mean that on its introduction there will be no RNRB available if the deceased holds assets of more than £2.2 million. This will rise to assets of £2.35 million in 2021/22 when the full £175,000 allowance is reached.
Reliefs such as Business Property Relief and Agricultural Property Relief are ignored when calculating the value of the estate.
4. Who can benefit from RNRB?
The RNRB is only available where the main residence passes to children (including adopted, foster or step children) or linear descendants on death.
However, the rules have been extended to accommodate situations where the family home passes into the joint names of the deceased’s child and their spouse.
5. What if I downsize?
The family home doesn’t need to be owned at death to qualify. This is of help to those who may have downsized or sold their property to move into residential care or a relative’s home.
Downsizing or the disposal of the property has to take place after 8 July 2015. But there is no time limit on the period between the disposal and when death occurs.
6. Multiple homes
Only one residential property will qualify.
A property which was never your residence, such as buy-to-lets, cannot be nominated.
7. Joint tenants and the trap for large estates
You may miss out on the additional nil rate band by not ensuring that your estates are shared in the most efficient way.
Many people own their family home as joint tenants. On the first death this means the house passes to the surviving owner with no IHT because of the spouse exemption. The RNRB is not used on the first death, with the surviving spouse inheriting the full unused allowance.
But if the combined estate on the second death is greater than £2 million then both RNRBs could be lost due to tapering.
Switching property ownership into tenants in common will allow both you and your spouse to control how the property passes on death, and potentially preserve the entitlement to the RNRB by keeping each partner’s assets below £2 million.
8. Reviewing your wills
It makes sense to keep wills constantly under review to cater for changing circumstances. Future legislative changes could have an impact on how well your will, works when you die.
This article does not provide specific advice and you should always seek professional advice from a qualified adviser before making any decisions.
Contact Martin Dodd on 01902 742221 or email him at [email protected] if you would like talk about money issues.
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