Your Home And Inheritance Tax

30/03/2017

The new residence nil rate band (RNRB) could increase the inheritance you can leave for children by up to £80,000 from April, rising to £140,000 by 2020.

But, there’s a danger some could miss out if they haven’t put the right plans in place to deal with the family home, or if there is a large estate.

To benefit from this additional amount, the family home must pass to direct descendants – that is, children or grandchildren. And to be entitled to the full amount, the value of individual estates must be below £2M. Beyond this, the allowance will be tapered, and lost altogether once values go above £2.35M.

The residence nil rate band is in addition to the standard nil rate band, which will remain frozen at £325,000 until April 2021. The additional amount will be phased in starting at £100,000 and increasing by £25,000 a year until it reaches £175,000 in April 2020.

These are the maximum amounts. The available allowance will be reduced if the value of the property is less than this, or if the value of an individual’s estate exceeds £2M.

Just like the standard rate band, the residence nil rate band will also be transferable between spouses and civil partners on death. So the allowance is not lost if the family home passes to the survivor on first death. This could mean if the second spouse dies after April 2020, a couple could benefit from a combined nil rate band of £1M (2 x £325,000 plus 2 x £175,000).

It also doesn’t matter when the first spouse died or even if they owned a property at all. The first spouse may have died many years before the introduction of the RNRB and the property held in the sole name of the survivor. Even so there will still be allowance which can be transferred to the surviving spouse.

The RNRB is only available where the main residence passes to ‘lineal descendants’ on death, which for most people means their children (including adopted, foster or step children) or grandchildren. It’s not, therefore, available for any lifetime planning with the family home.

The property doesn’t necessarily have to pass directly to them to qualify – the RNRB will still be available if the property is left via certain types of trust. If the trust gives a child or grandchild an ‘absolute interest’ in the home, the RNRB can still be claimed.

However, the residence nil rate band will be lost where the property is placed into a ‘Discretionary Will Trust’ for the benefit of the children or grandchildren. Many wills contain discretionary trusts as means of controlling when and to whom benefits are paid. But even if the children or grandchildren are to benefit and actually end up benefiting, the additional nil rate band will be lost.

You also don’t necessarily still have to own your property at death to qualify. There are rules designed to help those who have downsized or may have sold their property and moved into residential care or with a relative since 8 July 2015. Any replacement property and/or assets must form part of the estate and pass to descendants to qualify.

The residence nil rate band will be reduced by £1 for every £2 that the deceased’s estate exceeds £2M.

This will mean there will be no RNRB available if the deceased holds assets of more than £2.2M. This will rise to assets of £2.35M in 2020/21 when the full £175,000 allowance kicks in.

Clients with large estates which are likely to face some tapering may want to consider reducing the value of their estate to retain the extra nil rate band. Lifetime gifting can help bring the net estate below the taper threshold. Schemes such as Discounted Gift Trusts or Loan Trusts can help keep the value of estates down while still giving access to a regular stream of payments from the trust or the repayment of the outstanding loan.

Some people may therefore need to rethink how they plan to pass on wealth if they want to get the greatest benefit from the additional tax free amount. It may mean revisiting current wills to determine what happens to the family home on death and also start making some lifetime gifts if possibly affected by tapering.

If you would like more information on tax planning centred on your personal circumstances, please contact us >>

Written by Colin Caulfield | Director

Colin is a Chartered Financial Planner & Pension Adviser Of the Year Read more >>

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