The devilish detail on inheritance tax

In last summer’s Budget speech, significant changes to inheritance tax (IHT) were announced. This related to a new allowance for those who own their home and want to leave it to their children.

For these homeowners, a transferable Residence Nil Rate Band allowance (RNRB) will be introduced from April 2017. However, the Treasury have tried to address a number of objections to the Chancellor’s original proposals.

The Government came back with amendments to the Finance Bill to clarify the treatment of family homes left in trust, to extend the scope of the RNRB to include gifts to the spouses and civil partners of descendants and to extend the RNRB to include situations where someone has had to downsize or to sell their home completely, perhaps because they had to move to a residential home.

For anyone with high value estates, the new RNRB will be tapered, so estates worth more than £2.35m will not benefit. That means estate planning as usual; with the agenda of lifetime gifts and other tax mitigation are certainly worth considering.

An overview of the RNRB

Under the new rules, when a person leaves a residential property to direct descendants there will be an additional nil-rate band for inheritance tax purposes. It is attributable only to residential property, or the proceeds of property after down-sizing. The additional nil-rate band will be introduced from April 2017, increasing each year through to 2020. The property must have been a residence of the tax payer at the time of their death and only one property will qualify for the allowance if the deceased had more than one residence in the UK, their executors will have to elect which one is to receive the RNRB.

The RNRB can be claimed if all of the following apply to you:

  • You die on or after 6 April 2017.
  • You leave an estate valued at less than an upper limit, which is initially £2 million but is set to rise with inflation from 6 April 2021. The RNRB is tapered down for estates worth more than this.
  • You leave your home to qualifying beneficiaries. Some trusts for these beneficiaries also qualify.

Even if you die before 6 April 2017, or you leave your home to your spouse or civil partner rather than children or grandchildren, the RNRB is not necessarily wasted as it can be carried forward (together with any unused main nil rate band) for the benefit of your surviving spouse or civil partner.

Direct descendants include natural and adopted children, grandchildren and remoter descendants. It also includes step children and foster children, and the spouse or civil partner of a living or dead direct descendant, as long as any surviving spouse or civil partner has not remarried. For the purposes of the RNRB, adopted children are treated as being the children of both the adoptive and the natural parents. Direct descendants do not include brothers and sisters or nieces and nephews.

Tax year RNRB Main nil rate band Combined nil rate bands for both spouses or civil partners
2017-18 £100,000 £325,000 £850,000
2018-19 £125,000 £325,000 £900,000
2019-20 £150,000 £325,000 £950,000
2020-21 £175,000 £325,000 £1,000,000

The current nil-rate band of £325,000 per person will continue to be available for the same qualifying range of assets as at present, and without restriction on who inherits the assets.

The transferable allowance can be claimed even where a spouse dies before April 2017 and in this case, the property does not have to have been held in joint names.

Inheritance tax will continue to be charged at a rate of 40% on the value of an estate above any tax-free threshold.

What if I sell my home?

Provided that you sold your home on or after 8 July 2015 and at least part of your estate is inherited by a qualifying beneficiary, the RNRB will still be available under government proposals where you have sold your home and downsized to a less valuable property, or even if you no longer own a property.

What if I move out of my house?

The RNRB will apply if you own a property that is no longer your residence when you die (i.e. because you have moved into a care home), provided that it was your residence at some time during your period of ownership.

What if I have given my home to my children already?

If you still benefit from the property in some way without paying for it, for example, you continue to occupy it even though it has been given away or if you are co-occupying with your children after having transferred it to them, even if you have already given away your home to your children, it may still be possible to claim the RNRB on your death. However, it is still advisable to review your will.

What if my children do not want my home after I die?

It does not matter whether the qualifying beneficiaries who inherit your home want to keep it. The RNRB will still be available even if they sell your home immediately after your death.

What if I have more than one home?

If you own more than one property that is (or has previously been) your residence when you die, your executors must choose which one will benefit from the RNRB.

What should I do now

Review your will or make one.

To ensure you maximise the tax-saving effect of the RNRB we strongly recommend that you review your will, or make a will if you do not have one. The conditions for claiming the RNRB can be complicated and you should seek expert advice to ensure that your family can benefit from the enhanced nil rate band when you or your spouse or civil partner passes.

If you would like any more information in relation to this article then please feel free to contact me via email: simon.nicolaides@bowlinglaw.co.uk

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