As of 6 April this year a new inheritance tax (“IHT”) “residence nil-rate band” (“RNRB”) applies where the family home is left to children, grandchildren and other “qualifying beneficiaries on top of the existing £325,000 standard IHT nil-rate band.
The new allowance is being introduced in a staggered way with the amount starting at £100,000 this tax year and rising to £175,000 over the next three tax years; meaning that, by 6 April 2020, spouses and civil partners will, between them, be entitled to a combined nil-rate allowance of £1 million (the couples’ standard nil-rate bands of £325,000 and RNRB of £175,000).
Any unused RNRB can be transferred between spouses and civil partners, even if the firsttindividual died before 6 April 2017. However, if an estate exceeds £2 million, the RNRB is tapered down and it is lost altogether where (from 6 April 2020) the value of the combined estate of spouses or civil partners exceeds £2.7 million. This threshold ignores any IHT reliefs,
so those with valuable business or agricultural interests (which are outside the estate for IHT purposes) may finddthat their estate exceeds the threshold. Those without children will also not benefit.
The RNRB can still be available even if you downsize to a less valuable property, or sell your home; and if you own more than one eligible property, your executors can choose which one will benefit The home can be in the UK or overseas.
The RNRB is a valuable additional IHT relief but it will not necessarily apply automatically. If you think your estate could qualify, it is important to review your Will and any letter of wishes. This is so even if you are sure that your Will leaves your home to your children as the drafting of that gift is key; some gifts left on trust or subject to a contingency will not qualify, but this can be amended.
It is also important to review your estate planning in light of the RNRB, especially if your estate is near to, or in excess of, £2 million. With planning, it may still be possible to allow the RNRB to be claimed.
The RNRB is positive news, but you may need to take action to ensure it will apply to your estate.