As the end of the tax year approaches on 5th April, it’s a good time to make sure you’re maximising your opportunities for inheritance tax reliefs. This year, as well as taking advantage of exempt lifetime gifts and transfers, property owners should also look at how the new transferable residence nil rate band fits their profile.
The Residential Property Nil Rate Band
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 – the transferable Residence Nil-Rate Band allowance (RNRB).
To qualify, the property must have been a residence of the taxpayer and be left to direct descendants, so that excludes brothers and sisters, nieces and nephews. It will include natural, adopted, step and foster children, grandchildren and remoter descendants.
The RNRB will be available from April 2017, in a phased introduction over the next four years, starting at £100,000 per person. This additional IHT nil-rate band for residential property will be on top of the £325,000 per person nil-rate band, which continues to apply to all assets in your estate, regardless of their nature and without restriction on who inherits the assets.
Like the existing nil-rate band, the RNRB will be transferable to a surviving spouse or civil partner, if unused on the death of the first to die, as long as the first to die owned the property or a share in it. A transferable RNRB will be available even where a spouse has died before April 2017 and in this case, the property does not have to have been held in joint names.
By 2020, the RNRB will be £175,000 per person, giving a potential total IHT nil-rate allowance of £500,000 for a single person or £1m for a couple who satisfy the criteria.
The potential tax savings are significant – by 2020, the estate of a couple could see a saving of £140,000 in inheritance tax where all criteria are satisfied and the maximum RNRB allowance is utilised.
What may not qualify for the allowance
The additional residential property relief will taper away once an estate is valued at £2m, and estates worth over £2.35m will not benefit, and neither will certain types of trusts.
Check list for the new inheritance tax residential nil rate band
- You have direct descendants and intend to leave your residential property to one or more of them on your death
- You have a total estate worth more than the current £325,000 IHT nil rate band per person threshold, but less than £2.35m overall
- You have downsized or sold your residential property, or intend to, where the sale took place after 8July 2015 and you have retained the proceeds
Gifts and exemptions
More straightforward is the opportunity to mitigate inheritance tax by making smaller gifts or out of surplus income.
Everyone can make use of the £3000 per annum annual exemption which can be used to make gifts up to the total each year, and if the allowance is not used fully in any year, it can be carried forward one year.
On top of the annual exemption, the rules on small gifts allow individuals to gift up to £250 per recipient per year with no limit to the number of recipients. However, if you give more than £250 to any individual, you lose the exemption completely, even on the first £250. And you can’t use your small gifts allowance together with any other exemption when giving to the same person.
Any other lifetime gifts you make, other than gifts into a trust, are known as potentially exempt transfers (PETs). A PET becomes an exempt gift if you survive the making of the gift by seven years. However, if you die within seven years of making the gift, the value must be brought into account when calculating inheritance tax due from the estate. Tapering relief may be available on the tax attributable to PETS if you die more than three years after the gift, but only if the total value of the lifetime gifts made in the seven years before your death exceeds the nil rate band in force at your death.
Summary of IHT planning and checklist
If you’re concerned about inheritance tax and hope to mitigate it through gifting, asset transfer or the new residential property allowances, it’s important to check the position regularly. Getting it right, and reviewing any existing will, is key to making sure reliefs are maximised.
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This is not legal advice; it is intended to provide information of general interest about current legal issues.