April 2017 signalled the introduction of the first additional residence nil rate band allowance, meaning clients can increase the inheritance they leave for their children by up to £80,000, rising to £140,000 by 2020.
The maximum available amount of the additional threshold will increase yearly. For deaths in the following tax years it will be:
£100,000 in 2017 to 2018; £125,000 in 2018 to 2019; £150,000 in 2019 to 2020 and £175,000 in 2020 to 2021. For later years, the maximum additional threshold will increase in line with inflation (based on the Consumer Prices Index).
As we explained in our previous blog, the residence nil rate band, or RNRB, is in addition to an individual’s standard nil rate band of £325,000 and, just like the standard rate band, it is transferable between spouses and civil partners on death.
However, there are several scenarios when the RNRB may be lost.
1. Passing the family home to someone or something other than a direct descendant
2. If the estate is worth more than £2m, the allowance will be tapered by £1 for £2 the estate exceeds the threshold
3. If a lifetime gift of the home is made to children, rather than it being left to them on death, the RNRB will not be available to offset against that transfer
4. If the property is placed into a discretionary trust, even if the beneficiaries are children or grandchildren, RNRB is not available
If the RNRB is not used upon the death of the first spouse, the full amount can be transferred to the surviving spouse to use upon their death, provided the second death occurs after 6 April 2017. Even if the first death occurred before 6 April 2017, when the new RNRB wasn’t available, they are still deemed to have used none of their RNRB allowance, meaning a 100% uplift in the allowance is carried across to the surviving spouse to use upon their death.
Some initial concerns were raised that if someone had to downsize or sell their property to fund long-term care, they would essentially ‘lose’ some of their RNRB. Subsequently, a compensatory ‘additional’ nil rate band (ANRB), applying to main residences sold on or after 8 July 2015, has been made available, to compensate for any RNRB allowance lost. The calculation compares the percentage of the maximum RNRB that would have been available to be claimed at the time the home is sold with the maximum RNRB in the year of death. The ANRB will only apply on death if both the new lower value property and other assets are closely inherited by direct descendants and is restricted to the value of the assets being closely inherited.
As the RNRB is only available where the property is passed directly to descendants, some trusts, such as discretionary trusts, mean the allowance won’t apply. However, for trusts where the property is held absolutely for the benefit of the descendant or through an interest in possession trust, the RNRB can still be claimed. Other trusts such as Bereaved Minor Trusts, 18 – 25 Trusts and Disabled Persons’ Trusts also retain the additional nil rate band.
Where a person’s estate is at risk of exceeding £2m, lifetime gifting can help bring the net estate value below the tapering threshold. Schemes such as Discounted Gift Trusts or Loan Trusts can help investors reduce the value of their estates whilst still giving access to a regular stream of payments from the trust or the repayment of the outstanding loan. It is also possible to make gifts right up to the date of death to reduce the estate value and avoid exceeding the tapering threshold.
Business Property Relief
Shares held in companies that qualify for Business Property Relief (BPR) become free from IHT once they have been held for two years. These investments can then be passed onto beneficiaries when the investor dies with no IHT payable. Another benefit of BPR is that, unlike making gifts or settling trusts, IHT relief is achieved after just two years, rather than seven. However, the beneficiary of the BPR shares must keep the shares for seven years, or until their death, whichever is sooner, otherwise BPR will be lost and IHT payable on the amount inherited.
Whilst the increase in allowance is a welcome addition to the tax system, with many families set to benefit, it is important to ensure that estates are distributed in the most efficient way. With many spouses inheriting the full value of their partner’s estate upon death, some people will inadvertently find themselves with an estate totalling more than £2m and at risk of losing their RNRB allowance due to tapering.
If you would like advice on how to best distribute your estate to reduce your inheritance tax bill, please contact your Finura Partners adviser.
The Financial Conduct Authority does not regulate tax or trust advice.
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