Every individual currently has an inheritance tax nil rate band of £325,000; this is the value that your estate can be on your death before any inheritance tax is payable. Inheritance tax is currently charged at 40%.
From 6th April next year there will be an additional allowance that could potentially remove thousands of people’s estates from having an inheritance tax liability. The rules attached to this are not as clear as they may seem and it is now more important than ever that you review your Will to ensure that your beneficiaries will receive the maximum amount of tax free capital from your estate.
The basic concept is that there will be an additional nil rate band available on residential property which is left to a spouse, child (to include adopted child, step child and foster child) or descendant of a child or the spouse of a deceased child who has not remarried.
The RNRB will increase over future tax years as follows: –
It is important to remember that the above figures are the maximum allowance. If your house is worth less than the allowance, then the RNRB is limited to the value of your property. Further, if your net estate is worth more than £2 million then the RNRB will be reduced by £1 for every £2 you have above this amount. So, if you have a net estate worth £2.1 million in 2017 the RNRB available will be £50,000.
As is currently the case with the nil rate band, the RNRB can be transferred between spouses. So, on the death of the surviving spouse, their personal representatives can claim the benefit of the first spouse’s RNRB even if the first spouse died before 6th April 2017. This means that by 2020 on the surviving spouses’ death their estate could be worth £1 million before any inheritance tax is payable.This can only work if your Will is written correctly.
Frequently asked questions
If I leave my house to my child does it mean that they will receive it tax free?
The RNRB is not set against the property but against your entire estate. So, if you leave your property to your child but the rest of your estate to someone else then the beneficiaries who are entitled to the remainder of your estate will also benefit from the allowance. This may mean that the gift to your child is subject to inheritance tax, which may not be the outcome you intended. Careful Will planning can avoid this scenario.
If I sell my house prior to my death does it mean that my estate will lose the benefit of the RNRB?
If you have disposed of a residential property on or after 8 July 2015 and have either not replaced it or moved in to a less valuable property, then your estate may be able to benefit from the RNRB subject to certain conditions being satisfied. If the value at the date of sale exceeds or is equal to the RNRB then your estate may be able to utilise the full RNRB allowance available at the date of your death. If the value of the property is less than the RNRB then a percentage of the RNRB may be able to be claimed at the date of your death. It is therefore essential that accurate records are kept in respect of property that is disposed of and for the avoidance of doubt you should seek professional advice.
I own two properties is the RNRB available on either property?
The RNRB is not necessarily restricted to your main residence. Your personal representatives may be able to select which residence to apply the RNRB to. If you own more than one property it is important to seek legal advice about whether the RNRB will be able to be applied to your second property if it is more valuable than your main residence.
My home will become an asset of a discretionary trust which is written in to my Will, will my RNRB be available?
No. The property must be pass to a spouse, child (to include adopted children, step children and foster children) or descendant of a child, or the spouse of a deceased child who has not remarried absolutely or be held under the following trusts: –
I) A life interest trust set up by a Will where one of the specified people is entitled to a life interest in the property.
II) A disabled trust where one of the specified people is the disabled person.
III) A bereaved minor or bereaved young person trust.
My Will is written to leave my property to my grandchildren when they reach age 21. Does that mean my full RNRB will be available?
If you die and your grandchildren are under the age of 18 years old, then the RNRB will not be available against your property. This is because your grandchildren are not entitled to the property at the date of your death.
Is there anything that can be done if my estate cannot benefit from the RNRB because I do not update my Will before I die?
At the moment your personal representatives have certain powers under statute to take advantage of the RNRB if your Will is inadequate in its drafting. However, this is relying on the law not changing and your personal representatives knowing that a) it is possible and b) that they realise that it must be done within two years. The most appropriate solution is to ensure that your Will is drafted in a way to enable your estate to take full advantage of the inheritance tax allowances available.
If you need any further advice on RNRB please do not hesitate to contact our Private Client Skipton Solicitor Jenny Barron Tel: 01756 692 866 or email: email@example.com