At present, the first £325,000 of an individual’s estate is free from inheritance tax. A new Residential Nil Rate Band (RNRB) came into effect on 6 April 2017. This new band is gradually being introduced to provide additional relief for those passing their family home to their children upon the individual’s death.
By 2020/21, the new scheme will be fully introduced; this will mean that up to £1 million of a couple’s estate will be exempt from inheritance tax. For estates worth more than £2 million, the new allowance will be gradually tapered away.
To coincide with the introduction of the Residential Nil Rate Band, we have listed the most important things to note;
1. You can select which property the allowance is set against
The RNRB can be applied to any property (in or outside the UK) which has been used as a home by the deceased. This rule will require the property or the value of the property to be included in the person’s estate.
2. The allowance will still apply even if the property has already been sold
A common misunderstanding is the RNRB can be set against the value of a home which has previously been sold. This means people who have downsized or sold out of the market altogether are not penalised. The allowance can be used within their estate against the value of their former family home.
3. Outstanding mortgage borrowing is deducted before the allowance is applied
Many individuals seeking inheritance planning advice do not realise that the value of the home, for RNRB purposes, is the open market value of the property minus the liabilities secured on it, such as the mortgage.
4. The allowance only applies when the property (or its value) is left to direct descendants
For the RNRB rules to apply, the property must be inherited by the child, grandchild or other direct descendant of the deceased, the direct descendant’s spouse or civil partner. It is important to note that direct descendants do not include; siblings, nieces, nephews or other relatives.
5. The allowance will rise progressively over the next four years
The RNRB is set to increase from £100,000 per person in 2017/18, rising by £25,000 per tax year to £175,000 in 2020/21.
Get in touch
We encourage anyone considering estate planning, writing a will or restructuring their financial affairs to seek professional advice. The amount of tax which could be saved when these rules are applied correctly could be significant.
For further information about estate planning and trusts, please contact Rebecca Potton on 01923 224411 or email email@example.com