I can leave £1 million to my family without paying Inheritance Tax... or can I?
- AuthorKate Twigg
In 2017 the government announced that they were introducing an additional inheritance tax allowance that meant that married couples can leave up to £1 million worth of assets free of Inheritance Tax. However, things are not quite as clear cut as you would have been led to believe.
Every person in the UK has a tax free allowance of £325,000 which they can leave to whomever they choose without incurring any inheritance tax liability. They may also qualify for an additional tax free allowance known as the ‘Residence Nil Rate Band’ (RNRB) if they own a property that they are intending to pass down to their direct descendants. The term direct descendants can include children, remoter issue, step-children, adopted children and foster children and their spouses or civil partners.
The maximum amount of RNRB that any person can apply to their estate is £175,000 or the value of their house if it is less than this.
It is possible to transfer unused allowances to spouses (but note that it can’t be transferred to cohabitees) and therefore if everything is left to each other on the first death, the second spouse has an IHT allowance of £650,000 plus a maximum of £350,000 RNRB (or the value of their house if this is lower) which means they could potentially leave £1 million tax free.
So what is the catch?
- You must own a house to qualify for the RNRB (there are rules to allow for a cash amount if you have to go into care and there is also provision should you wish to downsize your property).
- You must pass your house onto your direct descendants.
- If your net estate exceeds £2 million the available RNRB reduces by £1 for every £2 that your net estate exceeds this amount. Therefore if your assets are over £2.35 Million then you will not qualify for any RNRB.
There are inheritance tax planning measures that you can do now to try to reduce your net estate to try to preserve the availability of the RNRB for your estate. Contact our Wills and Probate team for more information.
If you need legal advice in relation to Wills and Estate Planning, please contact our specialist Wills, Trusts & Probate team at Chattertons.