April 2017 sees the introduction of a new Inheritance Tax (IHT) nil-rate band that is available in addition to an individual’s own nil-rate band of £325,000. It covers the main residence (or other qualifying property the deceased had lived in) when it is passed to descendants.
The new Residence Nil Rate Band (RNRB) will apply if you want to pass such property to a child or grandchild. It’s important to note that only direct descendants (including adopted, foster and step-children) can benefit, and that doesn’t include nieces and nephews for example. So not everyone will be able to rely on it for IHT planning purposes.
The allowance is being introduced in stages over four years, with a limit of £100,000 from April 2017, rising to £175,000 per person in 2020. This is in addition to the individual allowance for IHT, which currently remains unchanged at £325,000.
HOW IT WORKS
Once the changes are fully implemented, they will mean that each parent will be able to leave £500,000 in assets that include a ‘family home’ component of at least £175,000. As the allowance can be passed from one partner to another on death, when the first partner dies their allowance can be transferred to the surviving partner, meaning that they will then have an allowance of £1 million. Where an estate is worth over £2 million, the family home allowance (but not the individual allowance of £325,000) reduces by £1 for every £2 of value above £2 million.
POINTS TO NOTE
Only one residential property will qualify for the relief, but it is possible to nominate which property is to qualify if there is more than one in the estate. Properties that the deceased has never lived in, such as buy-tolet properties, will not qualify.
The family home doesn’t need to be owned on death to qualify. This is a help to those who may have downsized or sold their property to move into care or to live with a relative. The RNRB will still be available, provided that the property disposed of was owned by the individual and would have qualified for the RNRB had the individual retained it, and provided that the replacement property or assets form part of the estate passed to the descendants.
To qualify, the downsizing or the disposal of the property must have taken place after 8 July 2015. There is no time limit on the period between the disposal and the date of death.
REVIEWING YOUR WILLS
It makes good sense to review the terms of your Will. The RNRB may be lost if the main residence is placed into a Discretionary Will Trust for the benefit of children or grandchildren. However, the rules surrounding the operation of the RNRB and the use of trusts is a complex area of law, and professional advice should be taken.
Tax treatment depends on the individual circumstances of each client and may be subject to change in the future. Tax, Wills and Trust advice is not regulated by the Financial Conduct Authority.
The information within the article is purely for information purposes only and does not constitute individual advice. The information contained within the article is based is based on our current understanding of taxation and can be subject to change in future. Taxation depends on individual circumstances as well as tax law and HMRC practice which can change. Some rules may vary in different parts of the UK. We cannot assume any liability for any errors or omissions it may contain.