Inheritance tax (“IHT”) is charged on your death at the rate of 40% based on the value of your assets. This 40% rate is only charged on any value exceeding the nil-rate band, which is currently £325,000. From 6 April 2017, an additional “residence nil-rate band” (“RNRB”) applies when the family home is left to children, grandchildren and some other individuals. Here is some information about this relief and how it can benefit you and your family.
How much is the RNRB worth?
The table below shows the RNRB levels up until 2020/21. The nil-rate band and RNRB are transferable between spouses and civil partners, meaning spouses and civil partners will between them be entitled to a combined nil-rate and and RNRB of £1 million by 2020.
|Tax year of death
|Main nil-rate band
|Combined nil-rate band and RNRB for spouses and civil partners
Will my estate benefit from the RNRB?
Your estate will benefit from the RNRB, in addition to the main nil-rate band, if you leave your interest in the family home to direct descendants such as children or grandchildren and other individuals such as stepchildren, adopted or foster children and, in some cases, spouses or civil partners of these individuals (“qualifying beneficiaries”). Unfortunately, those without children will not be able to benefit from the RNRB and this has been one of the major criticisms of the measure.
Your estate will also need to be valued at less than the “upper limit” which will be £2 million from 6 April 2017. The RNRB is tapered down for estates worth more than this and lost completely if your estate exceeds the upper threshold, which for the combined estate of spouses or civil partners will be £2.4 million in 2017/18 rising incrementally each year, reaching £2.7 million in 2020/21. These limits are set to rise with inflation, but not until 6 April 2021.
What if I sell or move home?
Under government proposals, the RNRB will still be available where you have sold your home and downsized, or even if you no longer own a property (for example, because you have moved into a care home), provided that the sale was on or after 8 July 2015 and at least part of your estate is inherited by a child or other qualifying beneficiary.
What if I have more than one home?
If you own more than one property that is (or has previously been) your residence, your executors must choose which one will benefit from the RNRB. The home can be in the UK or overseas.
What should I do now?
Review your Will now or make one
We recommend you do this even if you think your existing Will already leaves your home to your children as the conditions for claiming the RNRB are complicated. Not all gifts to children (or other qualifying beneficiaries) qualify; there are restrictions for certain gifts on trust or gifts to take effect when your children reach a specified age, for example. You should seek expert advice to ensure that your family can benefit from the potential IHT savings that the RNRB can offer.
Review your estate planning strategy
If your estate is worth more than £2 million, or on the cusp of this amount, you should review your estate planning as it may be possible to arrange your affairs to allow the RNRB to be claimed wholly or in part.
If you have given away your home to your children already or have carried out any tax planning to reduce the value of your interest in it for IHT purposes, you should review these arrangements to check whether your estate can still benefit from the RNRB.
Examples of Common situations
Example 1: Adam and Belinda want the survivor to have a life interest in their property
Adam and Belinda are married with three adult children. Adam’s Will gives Belinda a life interest in his half of their home, passing to their three children when Belinda dies. Belinda’s Will mirrors Adam’s. The couple’s combined RNRB is potentially available on the death of the survivor but their Wills should be reviewed to ensure the life interest trust does not contain any terms that restrict the relief.
Example 2: Caroline and David are not married
Caroline has two adult children from her first marriage. David cannot benefit from the RNRB unless he and Caroline marry and he wants to leave his share of their home to his new step-children. Caroline can benefit from the RNRB if she leaves her share of their home to her children. She should review her Will to check that the format of the gift will qualify.
Example 3: Fiona and Graham have combined assets worth over £2 million
Fiona and Graham are married and jointly own a property valued at £1 million. They have four adult children. Graham has investments worth £1 million, as does Fiona. Their Wills pass their estates to the other on the first death, then to their children on the second. If Graham dies first, his £2 million estate will not benefit from the RNRB as the assets do not pass to children.
Fiona will inherit Graham’s assets, giving her a combined estate of £3 million. As the £2 million threshold is exceeded, the RNRB cannot be claimed on her death. Fiona and Graham could review their Wills to avoid this “bunching” effect on the second death.
If part of their estate was left to children on the first death, the RNRB could be claimed. They could consider making lifetime gifts to reduce the size of their estate.
The RNRB will increase the part of your estate that is taxed at 0% rather than 40%, meaning the RNRB could enable an additional £100,000 to £350,000-worth of assets to pass to the next generation without a charge to IHT. Although the conditions that you have to satisfy to benefit from this tax relief are unnecessarily complicated, and do not fulfil the Government’s promise of a £1 million IHT-free limit, it is an important relief that will financially benefit your heirs.
For further advice or to discuss reviewing your Will or making one, please contact Eleanor Metcalf, Jenny Cutts or your usual Wedlake Bell adviser.