Inheritance Tax Update

Inheritance Tax & the New Residence Nil Rate Band

Currently, each individual can leave up to £325,000 without paying IHT – this is known as the Nil Rate Band (“NRB”). 

For married couples or civil partners, any unused percentage of the NRB can be transferred from the estate of the first to die to the estate of the second to die.  As there is no IHT between UK-domiciled spouses or civil partners, leaving everything to the survivor usually means a doubling of the NRB in the survivor’s estate (assuming nothing else has used up some or all of their respective NRBs) and so a couple can leave an estate of up to £650,000 tax-free. 

From 6 April 2017, there will be an additional IHT allowance known as the Residence Nil Rate Band (“RNRB”).  This is being phased in over the next four tax years:-

  • 2017/18 - £100,000
  • 2018/19 - £125,000
  • 2019/20 - £150,000
  • 2020/21 - £175,000

So, by 6 April 2020, it will be possible for an individual to have a combined NRB and RNRB of £500,000.  Between a married couple or civil partners, it will be possible to leave £1,000,000 free of IHT.  This is because, as with the NRB, the unused percentage of the RNRB can be transferred from the estate of the first spouse or civil partner to the estate of the survivor.

However, the RNRB is not simply given to you like the NRB.  Instead, it is based upon leaving your residence (or a sufficient interest in it) to, broadly speaking, one or more “lineal descendants”.  Those who have married or formed a civil partnership with such descendants will also count, as will a widow(er) or surviving civil partner of a lineal descendant who has not been married or become anybody else’s civil partner in the period before your death.

When considering “lineal descendants” the legislation has widened the definition of a child to include step-children, foster children, natural children who have been adopted out of a family and a child for whom the person has been appointed as a guardian or special guardian for that child when they were under the age of 18.  Adopted children (i.e. adopted into a family) are treated in the same way as natural children.

Any child who inherits does not have to be under the age of 18 – in other words it is fine to be an “adult” child.

The way a person inherits is important.  The simplest way is outright inheritance – by Will, intestacy or through other ways that property can pass.  In addition, certain types of trust for the benefit of such a person will also count.  However, the types of trust that qualify are relatively few and Wills have to be drawn carefully to ensure that trusts are compliant.  A common type of trust that is not compliant is an age-contingent trust for grandchildren. 

The RNRB is also limited to the lower of the RNRB or the net value of the residence.  Therefore, if the value of the property less any outstanding mortgage is less than the RNRB for the tax year in question, it is only the lower amount that is available.  At the other end of the scale, if the estate is worth more than £2,000,000 then the amount of the RNRB tapers at the rate of £1 for every £2 in excess of the £2m. limit. 

Finally, the recent Finance Act 2016 has introduced provisions dealing with the situation where somebody has downsized on or after 8th July 2015.  In those circumstances, a complicated formula seeks to ensure that RNRB is not diminished or lost because a less valuable residence or even no residence is owned at the date of death.  If you wish to rely upon the downsizing rules, then careful records must be kept of the sale value of the earlier property.   

The new RNRB is clearly a welcome addition to the existing NRB.  However, making sure that your estate benefits from it is not straightforward and a careful approach needs to be taken when making your Will.   Crosse + Crosse have significant expertise in Wills and Trusts and would be delighted to help you maximise the tax-saving opportunities afforded by the new RNRB.

N.B.  Please note that this article is there to provide a broad overview only and should not be relied upon with regard to your own particular situation.  Any person reading this note must take expert advice before taking or refraining from any action on the basis of these notes.

Crosse + Crosse Solicitors LLP has a dedicated team of lawyers who would be happy to assist with any queries you may have in relation to these or any other matters.  We can be contacted on 01392 258451.