Posted on Apr 10, 2017 in Private Client by Chris Gardiner
As George Osborne started his sixth job as a newspaper editor last week, his much anticipated ﾑResidence Nil Rate Band' from his previous job as Chancellor of the Exchequer came into force. Back in 2015, the Conservatives promised the British public a ﾣ1 million tax free allowance from Inheritance Tax (IHT) on death. As always with politics, it was never going to be that simple. What has been introduced is a complicated piece of legislation which will allow married couples (or those in a civil partnership) to potentially reach the ﾣ1 million allowance if they meet the strict criteria that have been set for qualifying. Here are the most important things you need to know about this new allowance; How much is the new allowance? The allowance has been introduced (with effect from 6 April 2017) at a rate of ﾣ100,000. This will rise on April the 6th every year by ﾣ25,000 until it reaches ﾣ175,000 in 2020. It will then only rise in line with inflation and this will be measured by the Consumer Price Index. In a similar way to the ordinary Nil Rate Band, if your estate passes to your spouse on first death, when your spouse dies they will have their own residential nil rate band, your transferable nil rate and will be entitled to use your transferable residential nil rate band as well. How can you qualify for the relief? You can only qualify for the relief if your property is passing to ﾓdirect descendantsﾔ on death. Direct descendants are set out in the legislation as children, grandchildren, step- children, adopted children or fostered children. Your property must be passing to one of these groups on death, or on second death if you are a married couple. Nieces and nephews do not qualify. What are the main restrictions? 1. The most notable is that the relief is only available on estates under ﾣ2 million. Once an estate is over this amount, the relief tapers by ﾣ1 for every ﾣ2 and this means by 2020, if your estate is worth over ﾣ2,350,000, it will not qualify for any relief (and there will be no transferable nil rate band relief to pass to a surviving spouse / partner). 2. The level of allowance available to you is directly linked to the value of your property. If your property is only worth ﾣ100,000 on death, the relief will be capped at ﾣ100,000. Any house worth over ﾣ350,000 after 2020, will still only get ﾣ350,000 of allowance. 3. Property that passes into a Discretionary Trust on death for the benefit of direct descendants will not qualify. This is because the property has to be becoming part of the direct descendant's estate. This does however mean that property which is being held in Liferent Trusts for the ultimate benefit of direct descendants will still qualify for the relief. Do you miss out if you downsize or sell your house and move into residential care? As long as this was done after 8 July 2015 then the answer is no. If you downsize your property the relief will still be available on the value of your previous property as long as the new property and/or the remaining funds are passing to direct descendants. Good record keeping is essential in these circumstances and it may be sensible to ring fence the capital which was not reinvested in the new property so that it is easily identifiable to HMRC on your death. Can I use the RNRB on more than one property? No. If you own more than one property, you do not get a separate relief for each property and you cannot carry over any unused relief to use as relief on a second property. Only one residential property will qualify and your executors will need to decide which property it will be. You must have lived in the property for a period before your death, although you need not have lived their permanently. In some circumstances, a holiday home could therefore be the nominated property if it is worth more than the family home. What issues should I be thinking about now? Firstly, you should review your Will. Many Wills make use of Discretionary Trusts and although these types of Trust provide many benefits, they may prevent you from qualifying for up to ﾣ350,000 of tax free allowance after 2020. If your estate is just over ﾣ2 million, you may want to speak to a professional advisor about how you can reduce your estate to below this figure to ensure that you qualify for this allowance on death. As with all tax planning, keep your Will under review and keep good records. If you plan to downsize, make sure that any funds that are not reinvested in your new property are identifiable as funds still passing to direct descendants on death. Nil Rate Bands often appear to be straightforward as a concept, but can give rise to complex issues. If you need more information or specific advice, please contact Chris Gardiner our Private Client team on 01334 477107 or by email at email@example.com or contact a member of the Private Client team.