£1 million free of Inheritance Tax – too good to be true?
A guest blog by Iain Wanstall, Consultant at Wanstall Consulting, Wills & Estate Planning.
When the Residence Nil Rate Band (RNRB) came into force, many headlines proclaimed that couples could have up to £1,000,000 free of Inheritance Tax (IHT) from 2020. This was clearly excellent news, but is it quite as good as it sounds?
The Residence Nil Rate Band is certainly a very useful benefit – when it applies. In this blog, we will consider how and where the RNRB could apply, who won`t benefit from it, and when to review existing Wills.
How does the Residence Nil Rate Band work?
The Residence Nil Rate Band (RNRB) came into effect on 6 April 2017. If someone dies after that date and they leave a property that they own, or co-own, to direct descendants, the estate could qualify for the RNRB. This is in addition to the normal Nil Rate Band (NRB), which is currently £325,000. The RNRB is now £150,000 and will increase to £175,000 in April 2020.
Married couples and those in civil partnerships can potentially combine their respective allowances. If your spouse or civil partner died before you, their NRB and RNRB allowances could be added to yours. This could result in an overall IHT ‘ tax-free’ allowance of up to £950,000, rising to £1,000,000 in April 2020.
What are the requirements for Residence Nil Rate Band to apply?
The law relating to the RNRB is quite complex, so we will only cover some points in outline here.
1. When you die, you need to own or have owned a property.
If you did not own a property, the RNRB is not available. If you sold your property, e.g. to finance care accommodation, there are ‘downsizing provisions’ that mean you can still benefit from the RNRB.
2. Your property needs to pass on to direct descendants.
Direct descendants include:
- your children, including adopted, step and fostered children and children where you are the guardian
- your children’s children and descendants
- your children’s spouses or civil partners (if still married or in a civil partnership when you die)
If you do not have any children or their remoter descendants, you will not benefit from the RNRB. With unmarried couples, if one party has children and the other does not, unless the one with no children has adopted their partner`s children, that person will not benefit from the RNRB. The RNRB is essentially available for married couples and civil partners.
3. Although the RNRB is still available where certain trusts are used in your Will, it may be at risk.
You should consider reviewing your Will if it includes a trust or specifies an age for your children or grandchildren to inherit – this is often 25, which could affect the RNRB.
The RNRB should still be available with life interest trusts for married couples and civil partners, where the property passes to direct descendants on that person`s death, but again it would be advisable to check the terms of your Will.
The RNRB is not available where the property passes to a discretionary trust in the Will, even where the discretionary beneficiaries are direct descendants. This is also the case with the so-called NRB Discretionary Trust, which was used extensively before the introduction of the Transferable NRB in 2007 for IHT planning. However, the RNRB could be protected if the property is transferred to direct descendants within two years of the trust beginning, but professional advice should be taken.
4. If the value of your estate exceeds £2million, the amount of RNRB is reduced. It is not available if the estate exceeds £2.2 million.
Planning steps can be taken to protect the RNRB, such as carrying out lifetime planning and/or planning in your Wills. This could include making gifts to reduce the value of your estate – e.g. to family, friends or charities. Again, professional advice should be taken.
The Residence Nil Rate Band can be an extremely useful way to reduce the inheritance tax liability on many estates, but only if it actually applies!
I, therefore, recommend that you review your existing Wills, and affairs generally, to see if you need to change the terms of your Wills, which may well have been prepared before the RNRB was introduced in 2017.
So, £1 million free of IHT could certainly be true, but not necessarily and certainly not in all cases.
Find out more
For more advice on how your Will could affect your inheritance tax bill, call Iain Wanstall from Wanstall Consulting, Will & Estate Planning on 01296 415700 or email firstname.lastname@example.org