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The One Million Pound Inheritance Tax Allowance

View profile for Jacqueline Marshall
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As many people are aware the first £325,000 of their estate is free from Inheritance Tax (IHT) on death, this is known as the nil rate band (NRB).  This NRB applies on death and also on Lifetime transfer where the deceased does not survive 7 years after making the gift.

From the 6th April 2017 a new IHT Residence Nil Rate Band (RNRB) will be introduced.  As the name suggests this new IHT allowance attaches to the family home.  It is an additional allowance to the existing NRB and in order to qualify the following conditions must be met;

  • The property must have been the residence of the deceased at some point.  Only one property can attract the relief so in an estate where the deceased lived in more than one property, the personal representatives can elect which property to chose.
  • The property must be left to ‘direct descendants’.  This is widely defined to include children, grandchildren, step-children, adopted and foster children.

The new RNRB allowance is to be phased in over the next 4 years.  From April 2017, the RNRB will be £100,000 increasing by £25,000 each tax year until 2021 where the maximum allowance will be £175,000.  This is the maximum relief available, if the net value of the property is less than this, the amount of relief will be reduced.

The RNRB is also capped and will be tapered where the net estate is worth in excess of £2million.  The relief is reduced by £1 for every £2 that the estate exceeds the limit.  On the introduction of the RNRB in April 2017 if your estate is worth above £2.2M there will be no relief available.  By the time the RNRB is fully in force, this will increase to estates worth above £2.35M.

As with the existing NRB, it is possible to transfer the unused portion of the RNRB to a surviving spouse.  The unused percentage of the RNRB from the estate of the first to die can be claimed when the second spouse dies.

There are also additional provisions that allow for downsizing to be taken into account so that the relief is not lost should an individual have moved into residential care or moved in with a family member.  The RNRB will still be available provided the property that has been disposed of was owned by the deceased and would have qualified for the RNRB had the deceased retained the property, the replacement property/assets form part of the deceased’s estate and pass to direct descendents.  The downsizing provisions will apply to any property sold after 8 July 2015, it is therefore important to ensure that any paperwork relating to the sale of your residence should be kept to ensure your personal representatives have the information required to claim the RNRB.

The use of trusts has to be carefully considered.  As the legislation provides that the property has to pass to direct descendants, the use of a trust may mean the RNRB could be lost. Certain trusts, such as bereaved minors trusts, 18-25 trusts and disabled trusts are covered by the legislation and the RNRB will apply to these.  But care needs to be taken as there are many circumstances where leaving your estate to a trust would lose the benefit of the additional RNRB.  Given the complex rules surrounding both the new RNRB and trusts it is imperative that you seek professional advice if you wish to leave your estate in this manner.

Whilst I am sure everyone will agree, the availability of any additional IHT free allowance is a welcome addition for anyone concerned their estate may be liable to IHT.  Unfortunately however, the new provisions are complex.  Effectively an estate can potentially benefit from 3 separate NRB provisions all of which have slightly different rules, the normal NRB which is available to all, the unused NRB that is transferable and claimed on the death of the second spouse and the RNRB which is only available if the relevant conditions are met.  There are also a number of people who will not benefit from the new allowance at all;

  • Anyone who does not own their own residential property i.e. people who may have chosen to rent property and invest their savings elsewhere, such as stocks and shares or in a buy to let portfolio (neither of which qualify for the additional RNRB)
  • People who have no children, for example, two sisters who live together will not benefit from the additional allowance when passing their share of their property to the other on death.

It would have been much simpler if, as had been mooted, the NRB was simply increased to £500,000 per person giving each couple the much heralded £1million IHT free allowance without the added complexities of applying or claiming different reliefs on the death of a loved one.