Inheritance tax changes now offer the ability to shelter up to £1million

Two years ago the government introduced a major inheritance tax change, the  Residence Nil-Rate Band (RNRB) on top of the basic IHT allowance of £325,000. The main aim of the RNRB is to make it easier for individuals to pass on their family home without incurring inheritance tax. To find out more about the RNRB and how it may be of benefit, we have interviewed one of our senior lawyers, Mr Christopher Hussey.

Who does the RNRB affect?

The residence nil-rate band inheritance tax change applies to individuals with direct descendants who have an estate (including a main residence) that exceeds the inheritance tax (IHT) threshold (or nil-rate band) of £325,000 for 2019/20.

How does it work?

If you’re giving away your home to your lineal descendants (children or grandchildren -including adopted, foster and step-children) you may qualify for the RNRB, meaning thanks to the inheritance tax change you’ll gain an additional threshold before IHT becomes due on your estate. This is currently £150,000 per person and will rise to £175,000 per person in 2020/21.

Can you provide a simple example of how the RNRB works in practice?

John dies in the tax year 2020 to 2021 and leaves to his children:

  • a home worth £300,000
  • other assets worth £190,000

The maximum available RNRB in the tax year 2020 to 2021 is £175,000.

RNRB for the estate £175,000 (the lower of £300,000 and £175,000)
basic Inheritance Tax threshold £325,000
estate value £490,000
less RNRB – £175,000
remaining value £315,000
less basic Inheritance Tax threshold – £315,000
amount that Inheritance Tax is due on £0

In this case the full RNRB Inheritance Tax Change has been used up, but £10,000 out of the basic threshold of £325,000 is unused and can be transferred to John’s wife.

From when does the RNRB apply?

The Inheritance Tax Change applies to any deaths that have occurred since 6th April 2017. The allowance is increasing in increments of £25,000 to £175,000 by 2020-2021.

Is the RNRB transferable? What happens if my partner died before April 2017?

Like the standard nil-rate band, any unused portion of the RNRB is transferable between spouses and civil partners. It’s the unused percentage of the RNRB from the estate on the first death which can be claimed on the second death.

If your partner died before 6th April 2017, their estate would not have used any of the RNRB because the Inheritance Tax Change wasn’t available. The full RNRB will be available for transfer unless the value of their estate exceeded £2 million.

Are there any catches that I need to be aware of?

The RNRB can only be claimed in relation to one residential property. If someone owns more than one residential property it will be down to the personal representatives to nominate which property should qualify. Property which was never a residence of the deceased, such as buy-to-lets, can’t be nominated.

You could risk losing the RNRB if, for example, the property passes into a discretionary trust for the benefit of children or grandchildren. However, some trusts for the benefit of children or grandchildren will not result in a loss of the allowance. The RNRB can still be claimed if the trust gives a child or grandchild an absolute interest or interest in possession in the home. Further rules exist around trusts and it would be prudent to contact us to seek further advice in relation to this area of the law as it can be very complicated.

You should also note that the Inheritance Tax Change is subject to a tapered withdrawal of 50% if an individual’s estate is worth more than £2 million. In other words, you will lose £1 of the additional threshold for every £2 of your estate that exceeds £2 million.

Contact Us Today

If you require assistance with the preparation of a Will, help with administering an estate, or are after tax planning advice generally then please contact Arlingsworth Solicitor’s Private Client Department on +44 (0) 1273 696962. Alternatively, request a callback, or email info@arlingsworth.com. You can also follow us on FacebookTwitter and LinkedIn for any other important news and updates.

*Disclaimer: The information in this Q&A blog is for general information only and reflects the position at the date of publication. It does not constitute legal advice and should not be treated as such. It is provided without any representations or warranties, express or implied.*

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