Inheritance Tax Update
The new residence nil rate band (RNLB) could increase the inheritance you can leave for your children by up to £100,000 from April, rising to £175,000 by 2020. There’s a danger that you could miss out if you haven’t put the right plans in place to deal with the family home, or if you have a large estate. Correct planning is required to ensure you benefit from this additional allowance.
In order to qualify, the family home must pass to direct descendants - that is, children (including adopted, step or foster children) or grandchildren. And to be entitled to the full amount, you will need to keep the value of your individual estate below £2M. Beyond this, the allowance will be tapered, the allowance will be lost altogether once estate values rise above £2.35M. It is important to consider planning strategies such as lifetime gifts in order to remain below this threshold level.
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 your individual 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 risk of losing your entitlement
There are two main situations where the residence nil rate band may be lost:
1. Passing the family home to someone or something other than a direct descendant;
2. The allowance is tapered if the estate is greater than £2M.
Planning is therefore important to ensure that an opportunity to claim the additional nil rate band is not lost.
Who should you leave your residence to and how?
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 or interest in possession in the home, the RNRB can still be claimed. Other trusts such as Bereaved Minor Trusts, 18 - 25 Trusts and Disabled Persons' Trusts will also retain the additional nil rate band
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.
It's worth remembering that you don’t necessarily still have to own the 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. And once in the estate, the property does not literally have to be transferred to your children or grandchildren – the executors may choose to sell the property and pay out each beneficiary’s share of the house in cash.
Tapering for estates over £2M
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.
Reliefs such as Business Property Relief and Agricultural Property Relief are ignored when calculating the value of the estate.
People 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 you keep the value of your estate down while still giving access to a regular stream of payments from the trust or the repayment of the outstanding loan. This might ease concerns for those of you who are not in a position to give up complete access.
It’s also possible to make gifts right up to the date of death to reduce the value of the estate for the purpose of tapering the residence nil rate band. While chargeable transfers including failed PETS will be dragged back into the estate to calculate the taxable estate, they're not added to the value used for tapering.
For more information on this please contact our in house specialist Linda Little, Tax Manager on 01946 692423 or email firstname.lastname@example.org