Last year’s Budget introduced a ‘Residence Nil Rate Band‘. It’s been extended further this year. Basically, for deaths after 6th April 2017 a new Residence Nil Rate Band (RNRB) will be available. This allowance will reduce the burden of Inheritance Tax (IHT) for a lot of families. It will make it easier to pass on the family home to direct descendants without a tax charge.
How does it work?
Currently, if your net estate is more than £325,000 (the personal nil rate band allowance) IHT can be charged at 40 % on the excess. The RNRB is in addition to the personal nil rate band to help reduce IHT. It will start for tax year 2017/18 at £100,000 and will increase by £25,000 each tax year to 2020/21 when it will be £175,000. It will apply to a person’s interest in residential property, which has been their main residence, if it’s left to one or more direct descendants in their Will. This includes children (and adopted, foster or step-children) and grandchildren.
For instance, a person may pass away during tax year 2017/18 and gift 50% of the family home to their children directly in their Will. The RNRB will allow £100,000 to be deducted from the value of their 50% share when calculating their estate for IHT purposes. The RNRB amounts each year are maximums. It will be reduced if the value of the property is less than the maximum for a particular year. For instance, if a person dies in 2020/21 (when the RNRB will be £175,000) and they leave their half of the property to their children, but the half share is worth £140,000, there would be £35,000 of the RNRB unused. The unused amount could be transferred to a surviving spouse’s own estate though on their later death.
It will also be available when a person downsizes or ceases to own a main residence. This would have to have happened after 8th July 2015. This ensures people are not disadvantaged if they sell a property during their lifetime (perhaps because of ill health before going into care).
By 2020/21 families could benefit by £1m of IHT allowances through careful Will planning using the RNRB.
It’s particularly relevant if you’re married or in a civil partnership and your combined estate is between £650,000 and £2.35 m.
What should you do now?
It’s important to review your Will to check if you’ve left a share of your main residence into certain types of trust. This could stop the RNRB applying. Similarly, it’s important to plan your Will, if you’ve not got one already, to consider leaving your residence to children or grandchildren.
It’s important to review how you own your home. Some people could miss out on this allowance if their home is owned as ‘joint tenants‘. If it is, the property would pass automatically to the surviving joint owner on death. This would prevent a share in the property being left in a Will.
We would be pleased to discuss your estate planning requirements to ensure you don’t miss out on the new allowance. Call us on 0175 321 6399.