With Ms. Reeves on the ‘Tax Warpath’ we have been dealing with a lot more enquiries lately around Inheritance Tax (IHT).
It is important to understand the allowances that your estate will be able to claim to avoid panic. We have lost count of the number of clients who were thinking they needed to almost impoverish themselves to avoid IHT.
Knowing your allowances, is really valuable when considering if you need to give capital away just yet.
The Residential Allowance or Residence Nil Rate Band (RNRB) exists in addition to the normal Nil Rate Band of £325,000 per person.
The RNRB offers a great Inheritance Tax advantage for many people. It is intended to protect some or all of the value of the family home from inheritance tax. The RNRB is currently £175,000 per person (£350,000 for married or civil partnerships).
It is offset against the value of a property as long as that home is being passed to direct decedents of the deceased. A direct descendant includes children and grandchildren (including step children, adopted children or foster children). This also includes where a qualifying residential property is left to trust on death where the direct descendant is treated as either owning the trust asset or having a qualifying interest in possession.
The main RNRB applies to deaths on or after 6th April 2017. This effectively gives you £500,000 in allowances for a single person and £1m in allowances for a married couple/ civil partnership.
The RNRB was phased in gradually from 2017 starting at £100,000 and increased by £25,000 every year until 2020 where it remained at £175,000. Watch out though! If the value of your joint estate exceeds £2 million then, the RNRB will be reduced by £1 for every £2 excess value.
If there is unused RNRB on first death; this can be transferred to a surviving spouse or civil partner in the same way as the standard nil rate band. The amount unused (expressed as a percentage of the amount available) will be applied to uplift the survivors RNRB entitlement on second death.
If there is more than one pre-deceased spouse or civil partner, the percentage from each of them are added together to reach a total. The percentage limit is 100%.
Where a first death occurred before 6th April 2017 – the estate of the surviving spouse will be entitled to a 100% uplift on both RNRB allowances at the time of the survivors death (i.e. £350,000 in total currently).
Any transferable RNRB must be claimed by the deceased personal representatives within two years from the end of the month in which the deceased died, or if later 3 months from the date when personal representatives start to act, or within a longer period at the discretion of HMRC.
As with all these things, we would strongly advise that you take professional advice from either ourselves, an Estates and Trusts Lawyer or an Inheritance Tax Accountant. There are many ‘quirks’ with these allowances and it is so easy to read one article and draw the wrong conclusion.
If you need any clarification at all – we are always here for you.
My best wishes as ever.
Beth
