Planning to minimise the inheritance tax (IHT) due on your estate is always important, but the recent introduction of the residence nil-rate band (RNRB) means now could be the ideal time to review your existing plans.
What is the RNRB?
IHT is charged at 40% on estates worth in excess of the nil-rate band, which is currently £325,000. Married couples and registered civil partners can pass any unused nil-rate band on death to one another.
However, 6 April 2017 saw the introduction of an additional nil-rate band – the RNRB – which is intended to take the family home out of IHT for all but the wealthiest. The RNRB is set at £100,000 for deaths in 2017/18, rising to £125,000 in 2018/19, £150,000 in 2019/20, and £175,000 in 2020/21. It is then set to increase in line with the Consumer Prices Index from 2021/22 onwards.
The introduction of the RNRB means that up to £1 million of a married couple’s estate could eventually be taken outside the scope of IHT if the full nil-rate bands (£325,000 + £175,000 x 2) are available to each spouse.
The RNRB is also available when a person downsizes or ceases to own a home on or after 8 July 2015 where assets of an equivalent value, up to the value of the RNRB, are passed on death to direct descendants.
It is important to note that the additional band can only be used in respect of one residential property, which does not have to be the main family home but must at some point have been a residence of the deceased.
There will also be a tapered withdrawal of the additional nil-rate band for estates with a net value of more than £2 million (at a withdrawal rate of £1 for every £2 over this threshold).
Reviewing your estate plan
It is always advisable to review your Will and planning strategies on a regular basis, but it is particularly pertinent following changes in your personal or family circumstances or significant new tax rules. The introduction of the RNRB is one such example.
The additional nil-rate band will only apply when a main residence is passed on death to one or more descendants (including a child, stepchild, adopted child or foster child) of the deceased and their descendants. In order to utilise the RNRB, you may need to review your Will to check that the property is being bequeathed to the correct beneficiaries. The home doesn’t have to be specifically mentioned in the deceased’s Will, as long as it has at some point been a residence of the deceased.
It is also important to review your Will where property has been left in trust, as certain types of trusts may not be eligible for the RNRB. This is a complicated area and we suggest that you consult an expert for further advice.
If downsizing is contemplated, special care is needed to include provisions in a Will which will satisfy the conditions of obtaining the additional band.
For more information on the RNRB or for advice on other tax-efficient estate planning strategies, please contact us.