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Inheritance Tax and the Residential Nil Rate Band

With the property market on the rise across England and Wales, more and more houses are increasing in value. While, for homeowners, this is good news, house price appreciation does have a less positive consequence when it comes to inheritance tax liability.

For Will planning, a person’s estate is the total belongings left after they have died. This includes money, property, possessions, and any other assets (as well as any debts and tax liabilities).

Should a person die, the inheritance tax (IHT) threshold is £325,000 per person. It doubles to £650,000 for a married couple, as long as the first person to die leaves everything to their partner.

Currently, anything below this threshold is not subject to IHT, while anything over this limit is subject to a 40% tax bill.

However, with a growing number of families facing IHT liability because of a rise in house prices, last year the government announced plans to tackle this issue head on.

Under these measures, a new inheritance tax Residential Nil Rate Band (RNRB) will be introduced. This establishes the value of a residential property that is not subject to inheritance tax.

This band will start at £100,000 and increase by £25,000 per year until it reaches £175,000 in 2020/21. It will then continue to rise in line with the Consumer Price Index.

Any unused nil-rate band will be able to be transferred to a surviving spouse or civil partner.

In a nutshell, what this means is that, from 6 April next year, the IHT threshold will increase from £325,000 to £500,000, and that from April 2020, couples who own a property worth up to £1m will be able to leave it to their children or grandchildren completely free of IHT.

This additional allowance will be gradually withdrawn for estates worth more than £2m.

Residential Care

While good news for homeowners, the relief only applies to primary residences that are used (or intended to be used) as a home.

Should a person decide to sell their home to move into residential care, the relief will still be available if:

  • their assets are passed to their direct descendants on their death, and
  • the property was sold on or after 8th July 2015.

For example, assuming a person moved into a nursing home in December 2015, and his house has since been sold, providing he dies after 6 April 2017 the RNRB will still be available if he has left the proceeds from this sale to his children or grandchildren.

Downsizing

Concerns have also been raised that downsizing in retirement might deny individuals the opportunity to take advantage of the additional allowance. With any money made from the sale of a more expensive home ‘lost’ when it comes to tax relief.

However, providing certain conditions are met, the RNRB will still be available as if the individual had died while owning the original property. This is an attempt to encourage pensioners to free up larger properties for growing families.

In such circumstances, a calculation will be applied to work out how much RNRB is available, taking into account:

  • the RNRB had the individual died while still owning their former residence
  • their current RNRB entitlement, and
  • any unused allowance from a deceased spouse or civil partner.

Again, the relief only applies to primary residences.

The additional allowance introduced under the RNRB is only applicable on inheritances left to direct descendants (children, step-children, adopted/fostered children, grandchildren, etc.)

While it may sound complicated, a specialist Trusts & Estates solicitor will be able to work out exactly how much of a person’s estate is exempt from Inheritance Tax.

Please contact us on 0800 042 0700 if you would like further legal advice from a member of our team.

Find out more about our Trusts & Estates department

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