Christy Morrison, Head of Wealth Planning, reviews Inheritance Tax and the new Residential Nil Rate Band.
Inheritance Tax (IHT) is the tax levied on your estate when you die. An estate is made up of property, money and possessions.
Each individual has a ‘nil rate’ band of £325,000, therefore upon death, if the estate is valued under the nil rate band, no Inheritance Tax will be due. Furthermore, if you are married or in a civil partnership at the time of death your estate can pass to your spouse free of tax and any unused nil-rate band can also be passed to them also. If your estate is over the nil rate band, there will be IHT payable of 40% on the value in excess of the band. For example an estate worth £600,000 with one nil rate band available; £600,000 – £325,000 = £275,000 @40% = £110,000 IHT payable.
From 6th April 2017, there will be an additional main residence nil-rate band (RNRB) to use against the deceased’s interest in the value of their home (or assets representing it) that has at some point been occupied as the family home. This is available when the property is inherited on the death of the owner by a direct descendant of the deceased i.e. a child or grandchild on death.
The maximum amount of Residential Nil Rate Band is being phased in as follows:
£100,000 in 2017/18
£125,000 in 2018/19
£150,000 in 2019/20
£175,000 in 2020/21
It will then increase in line with Consumer Prices Index (CPI) from 2021/22 onwards.
Therefore every person will have a nil-rate band of £500,000 if they own their own home, and a married couple or civil partnership with have a nil-rate band of £1million. The new RNRB could result in an additional £140,000 Inheritance Tax saving once fully introduced.
The Residential Nil Rate Band will however be tapered when the deceased’s estate exceeds £2m, the RNRB will then be reduced by £1 for every £2 over this threshold.
This increase in the nil rate band may mean if you have an existing inheritance tax liability that this may no longer be a concern when the additional RNRB is introduced next year. However if asset growth is expected than this most likely will not solve your estate’s potential Inheritance tax liability on death. In the 2015/16 tax year 7.1% of deaths resulted in IHT being payable and the government received £4.4 billion in Inheritance Tax receipts; the forecast for 2020/21 when the new band has been fully introduced is 6% of deaths resulting in IHT being payable and £5.6 billion in Inheritance Tax receipts. Therefore although the number of estates effected will reduce when the increase is put in place the actual tax collected will increase by an estimated £1.2 billion. This increase in Inheritance Tax collected is as a result of the standard Nil Rate Band being frozen, the possible continual increase in property values and the tapering of the RNRB for estates valued over £2m.
The new legislation around the Residential Nil Rate Band also allows those who downsize to a less valuable property, sell or otherwise disposing of a property prior to death; to still benefit from the additional RNRB in most cases.
Estate planning is a complicated area of Wealth Planning, there are many different ways to reduce any potential Inheritance Tax payable on your estate but advice should be taken to ensure that a suitable solution is found for your individual circumstances which also considers all the above factors in relation to the Residential Nil Rate Band.
There are many investment, insurance and trust based solutions that can provide very effective estate planning to reduce any potential Inheritance Tax due on your estate. WHIreland Wealth Planning can assist you with calculating your potential Inheritance Tax liability and can then provide solutions to reducing this where possible. If you believe you have an Inheritance Tax liability the sooner you start to plan the better – to eliminate this tax completely. Please do not hesitate to contact us if you would like further advice or guidance.
Considerations
Care should be taken if leaving property in discretionary trusts as the RNRB is likely to be lost.
The date of 1st death of a spouse or civil partner does not matter, the RNRB will automatically be picked up at the point of 2nd death (as long as it’s after 6 April 2017) as the RNRB is fully transferrable.
Therefore there is no requirement for the first of the couple to die to own a qualifying residential interest at the time of their death for unused RNRB to transfer to the survivor.
Further consideration required ahead of first death if the £2m estate threshold is likely to be exceeded if all assets are transferred to spouse/civil partner on death.
Consider how asset value growth may impact on any future potential Inheritance Tax liabilities.