March 7, 2017
For deaths on or after 6th April 2017 an additional Inheritance Tax (IHT) allowance, called the Residence nil-rate band (RNRB) may be claimed to reduce any IHT payable.
Currently a deceased estate can pass up to £325,000 to any beneficiaries before IHT becomes payable. This is the nil-rate band (NRB). Gifts to spouses or civil partners and to registered Charities are free of IHT. Over the £325,000 threshold IHT is payable at 40%, although a lower rate of 36% can be claimed if at least 10% of an estate is passing to Charity.
Where one spouse or civil partner has died, if they have not used their IHT allowance of £325,000 then it can pass to the estate of the surviving spouse or civil partner, or if some is used the remainder can pass. This is known as a transferable nil-rate band (TNRB).
An additional £100,000, rising per annum until tax year 2020/21 to a maximum of £175,000 will be available as RNRB where certain criteria apply. For estates the IHT threshold could therefore be up to £500,000, and Â£1million for a married couple.
The additional allowance will only apply where the deceased owned a residential property at the date of death, which they had occupied at some point during their lifetime, or previously owned one which was sold after 8th July 2015. The beneficiaries of the estate must be direct descendants such as children or grandchildren.
If the deceased owned more than one property then their Executors can elect which property should have the RNRB applied, but the deceased must have lived in the property at some stage; the allowance will not apply to rental properties, or to non-residential property.
The RNRB can be transferred between spouses, so a married couple or civil partners may have up to Â£1million passing to their descendants IHT free after 6th April 2020. However, if their joint estates are worth over £2million tapering will reduce the additional IHT allowance.
One important point is that the additional allowance is only available against the actual value of the residential property. If the house is worth £200,000 at death, for example, that is the maximum amount of any RNRB allowance.
The RNRB also can’t be claimed if assets in an estate pass into a Discretionary Trust, even if the beneficiaries of that are intended to be the children or grandchildren.
In the past many Wills incorporating Discretionary Trusts were prepared for IHT planning before the transferable nil-rate band was introduced. These Wills may now have the opposite effect and reduce the IHT allowance available. Changing Discretionary Trust Wills should be considered, but if this is not done prior to a death it should still be possible to appoint assets out of the Trust after death in order to claim the RNRB.
Executors will need to claim the new RNRB and any transferable RNRB as part of the Probate application process, on the Inheritance Tax Account.
How can Tayntons help?
Tayntons can help with your Inheritance Tax planning by:
- Reviewing your Will
- Advising if the RNRB will apply in your current situation and discuss your likely IHT liability
- Advising if you are intending to downsize property or move into residential care
- Assisting with the administration of estates and claiming RNRB and TRNRB
- Preparing Deeds of Appointment
Contact Tayntons today for an initial consultation on 0800 1584147.