Inheritance tax planning isn’t something that makes for good dinner conversation, but it is something that should be given careful consideration. With inheritance tax, nil rate bands (NRB) and the introduction of a residence nil rate band (RNRB) by 2021, a couple could potentially save their loved ones up to £140,000 of tax on their death.
The existing nil rate band means that the first £325,000 of an estate’s value is taxed at 0%, with the standard inheritance tax rate of 40% applying to everything above that. There are exceptions, as anything inherited by a spouse or civil partner is exempt from inheritance tax. Similarly, the NRB of the first to die can be transferred to the surviving partner, assuming they inherit the entire estate of the deceased. When the surviving partner dies, their estate benefits from both NRBs, meaning the first £650,000 is taxed at 0% with the 40% rate applying to anything over and above this.
The new RNRB will come into effect from 6 April 2017, and in certain circumstances, will increase the amount of an estate that is taxed at 0%. The circumstances are complex, and it is advised to seek professional assistance in drafting a Will that will benefit from RNRB.
In essence, the additional RNRB will apply when you leave a qualifying residential interest (QRI) to direct descendants, i.e. children or grandchildren, including adopted and fostered individuals and step children. A QRI will usually be your share in the family home, but could also be the interest held or previously held in another property.
Certain constraints apply to estates where the RNRB is applied, and estates over £2 million will be subject to a gradual tapering of RNRB, but in essence, the full £100,000 RNRB can be claimed if:
• You die on or after 6 April 2017
• Your estate is valued at less than the upper limit (currently £2 million)
• You leave a qualified residential interest to your beneficiaries.
There is a reducing proportion of RNRB claimable over the £2 million limit, and your solicitor can discuss this with you if it is applicable. If you die before 6 April 2017, or you leave your share in your residential property to your spouse or civil partner rather than your descendents, the RNRB can still be carried forward along with any unused NRB by the surviving spouse or civil partner.
With the planned increase in RNRB allowance over the coming years, by 2021 if all allowances are transferred to the surviving spouse or civil partner, then an estate of up to £1 million will not be subjected to the 40% inheritance tax rate, assuming the estate is left to their children.
Finally, RNRB can still apply even if you have gifted your home to your children as long as you still derive some benefit from it, either by living in it, or by living in it with them. This should be discussed with a professional advisor however, as claiming RNRB on a house you have transferred will result in the property value being added back into your estate, which may increase the inheritance tax liability.
What is certain is that when considering asset transfers and Wills, if in any doubt, seek professional advice. With the potential savings easily surpassing the £100,000 mark, investing in sound advice at an early stage could be an incredibly financially astute move.
To find out how BPE could help plan your estate and provide for your loved ones, get in touch at firstname.lastname@example.org or call us on 01242 224433.
These notes have been prepared for the purpose of an article only. They should not be regarded as a substitute for taking legal advice.