As the end of the tax year approaches, it’s a good time to make sure you’re maximising your opportunities for inheritance tax reliefs. This year, property owners should look at how the new transferable residence nil rate band fits their profile.
Margaret Rowe, a Partner in our Wills, Trusts and Estate Planning team, examines the new regulations:
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. It includes natural, adopted, step and foster children, grandchildren and remoter descendants but excludes brothers and sisters, nieces and nephews. A spouse or civil partner of a living or dead direct descendant may also be the beneficiary, unless they have remarried.
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. These RNRB figures are maximum figures: if the value of your house, or your share in a house, is less, then that lesser value will be your RNRB.
The potential 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.
So, in tax planning terms it’s high priority and worth making sure your estate doesn’t miss out on the allowance if you are a potential match on the criteria.
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.
Trusts are frequently used to protect assets, for example when children are young or otherwise not fully capable of handling their affairs, or to provide for a new spouse after re-marriage while still making sure assets pass to children of an earlier relationship.
RNRB will be available where beneficiaries of a trust are direct descendants and the trusts provide an absolute right to benefit, or where a disabled person is the main beneficiary, but will not be available for so-called discretionary trusts. As the position is complex, anyone who has any form of trust in their will should make sure that it is still the best arrangement.
People will be allowed to sell a larger house and still retain the relief from inheritance tax, as the Government are keen to encourage older owners to down-size to free up larger properties. Only one downsizing move may be taken into account, so if there are several downsizing moves between 8 July 2015 and the date of death the executors can choose which is to be used for the purpose of the RNRB. Downsizing can include disposing of part of a property, for example part of your garden.
However, to hold on to the relief after downsizing, the proceeds of the downsizing cannot be passed to a direct descendant during a person’s lifetime, as the relief will not apply to reduce the tax payable on lifetime transfers that are chargeable on death within seven years of the gift. Again, this is rather complicated and requires specialist advice.
Checklist 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 intend to/sold your residential property, where the sale took place after 8 July 2015 and you have retained the proceeds
If you’d like to know more contact Margaret on 01952 208433 or firstname.lastname@example.org.