Since April 2017, the Residence Nil Rate Band for inheritance tax has been available to claim. The new allowance was announced in 2015, and over the months that followed, many questions were asked about how exactly the new rules would work.
So six months on from the date of introduction, what does this mean for those considering their inheritance tax position and wanting to make the most of the new provisions to provide for their loved ones?
How does the Residence Nil Rate Band affect individuals?
The Residence Nil Rate band (RNRB) is an additional inheritance tax allowance which can be utilised by those who have a residential property and wish to leave this to their direct descendants. This includes children, grandchildren, stepchildren and even widows, widowers and civil partners of descendants in certain circumstances. Unfortunately for those without such descendants the new allowance will be of no benefit.
The Residence Nil Rate Band for this current tax year (2017/2018) is £100,000 and is scheduled to increase by £25,000 each tax year for the next three years. This is in addition to the ordinary Nil Rate Band of £325,000. In both cases, for married couples, there is the option to transfer any unused allowance from the estate of the first spouse to die to the estate of the second spouse to die. So by 2020/2021 the combined allowances of a married couple could mean that £1 million of assets could pass free of inheritance tax.
It is important to note, however, that where a person’s estate exceeds £2 million then the availability of the additional allowance will be limited proportionately.
If someone has downsized their property since July 2015 their estate could potentially still benefit from the use of the RNRB allowance. If certain criteria are met the RNRB allowance could apply against the value of assets in their estate.
How can individuals make sure they take advantage of the allowance?
Whilst it is tempting to simply rely on these new allowances as the way to ensure that your family will benefit to the greatest extent, it is important that full advice is taken to maximise their potential benefit.
Incorporating Trusts into your Will can ensure flexibility to allow your executors to arrange your estate in the most tax efficient way whilst still benefiting your intended family members. By passing assets from your estate to a Trust, in certain circumstances, this may lower the overall inheritance tax bill by:
- Ensuring that the assets in the estate of a surviving spouse do not exceed £2 million;
- By ensuring that the growth in the value of certain assets is kept outside of the estate of the surviving spouse;
- By making sure that the value of assets which may be eligible for other inheritance tax reliefs, such as Business Property Relief, are fully utilised.
If you already have existing Trusts in place which contain a share or interest in a residential property then we would recommend that these Trusts are reviewed to ensure that they are arranged in a way that makes full use of the Residence Nil Rate Band, where necessary.
For more information on how your estate can benefit from the Residence Nil Rate Band, please contact Sarah Pull in our Personal Law team on 0161 475 7689.