Introduced in April this year, the new Residence Nil-Rate Band (RNRB) could save your estate as much as £140,000 in inheritance tax (IHT) if you pass your family home to your children on your death.
The RNRB is a tax-free allowance available to each individual on the passing of the family home which can be used in addition to the nil-rate band (NRB), currently £325,000, or £650,000 if you are able to make use of your spouse's unused NRB. Anything above this amount would be taxed at 40%.
You will only be able to make use of the RNRB if you pass the family home to your direct descendants – which includes your children, whether adopted, foster or step-children and also spouses of children in certain circumstances; it cannot be utilised where the home passes to others such as a sibling or nieces or nephews. Research by LV Legal Services shows that over 1.7 million people aged over 55 are leaving their home to a sibling, meaning they will not qualify for the extended allowance.
Helpfully, it will also be applicable in situations where the family home passes jointly into the names of the deceased's spouse and their child/children.
The RNRB will increase incrementally so that by 2020/2021, each person will have an RNRB of £175,000 to utilise against the family home.
According to LV's research, 72% of those asked were unaware of the changes or otherwise did not understand them. Of those that did know what the changes meant for them, 53% did not know that the RNRB can be applied against the cash proceeds received from the sale of the family home, which would be applicable in circumstances where downsizing is appropriate or where they need to move into residential care/in with a relative.
Not everyone will be able to make use of the RNRB. Depending on the size of your estate, the RNRB will be reduced by £1 for every £2 that the deceased's net estate exceeds £2 million. Tax reliefs such as Business Property Relief and Agricultural Property Relief are not taken into consideration in the calculation of the net value of the estate.
Martin Milliner, Director at LV, stressed the need for people to seek proper legal advice in relation to their estate planning and will writing in order to maximise the benefits available to them under the various tax-allowance schemes.
“This increased IHT allowance is a boost to those who’ve seen their homes rise in value and want to be able to pass on this wealth without sharp tax charges, but it’s crucial that they don’t fall prey to the sibling trap."
This is not legal advice; it is intended to provide information of general interest about current legal issues.
Our Private Client Team will be happy to assist you with all your estate planning matters. Please contact Gepp & Sons on 01245 228127 for further information.