CAN A COUPLE REALLY PASS £1 M OF ASSETS, FREE OF INHERITANCE TAX?
Financial Adviser, Michelle Groves addresses some of the most commonly asked questions about the new allowance which came into force for deaths after 6th April this year.
Inheritance Tax (IHT) is a tax on the estate (property, money and possessions) of a person who has died. It applies on the part of your estate that’s above the IHT threshold, which is currently £ 325,000, and is known as the Nil Rate Band (NRB). However a new allowance – the IHT
Residence Nil Rate Band ( RNRB)
was introduced on the 6th April. This is in addition to the nil rate band of £ 325,000, and is available when the deceased’s main residence is being passed down to direct descendants.
So how much is the RNRB and how much will I save in Inheritance Tax?
The RNRB will be phased in over 4 years starting this April at £100,000 per person and reaching £175,000 by 6th April 2020. Double up these allowances for a married couple and they have the ability to pass on £1million of assets, free of IHT!
But what if I am already widowed?
The RNRB will be transferable between spouses and civil partners on death, even if the first death occurred before 6th April 2017. Any unused percentage of the RNRB from the estate of the first to die can be claimed on the second death. A married couple or those in a civil partnership could potentially save up to £140,000 in Inheritance Tax when the second death takes place after 6th April 2020 and the family home passes to direct descendants on death.
Who can benefit?
The RNRB is only available where the main residence passes to children, but this does include adopted, foster and step children and linear descendants e.g. grandchildren. Also a husband, wife or civil partner of a lineal descendant.
Is there an upper limit?
Yes, the residence nil rate band will be reduced by £1 for every £ 2 that the deceased’s net estate exceeds £ 2million meaning that in 2017, the allowance cannot be claimed where the net estate is valued at more than £ 2.2million.
What if I own more than one property or want to downsize?
Only one residential property will qualify and the deceased must have owned and lived in the property at some time. A property that they owned but never lived in, such as a buy-to-let, won’t qualify. If the deceased didn’t own a home at the time of death because they sold or gave it away on or after 8th July 2015, the representatives may be able to claim a ‘downsizing addition’. The amount of this will usually be the same as the additional threshold that’s been lost when the former home is no longer in the estate. The property disposed of must have qualified for the RNRB and the replacement property/ assets must form part of the estate and be passing to descendants.
My Will leaves my home to a Discretionary Trust for the benefit of my children. Will it still qualify?
If a home is transferred into a Discretionary Trust then the deceased’s estate won’t qualify for the RNRB, even if the beneficiaries are direct descendants of the deceased. This is because the beneficiaries’ entitlement to use the home is at the discretion of the Trustees, so will not be treated as inheriting the home. If you are considering leaving your family home to a Trust you should seek legal advice to review the potential implications of this for claiming the RNRB.