Ensure you do not lock yourself out of a tax saving!
A new Inheritance Tax allowance - the “Residence Nil Rate Band” (“RNRB”) - comes into force today.
This will provide an additional allowance of £100,000 for many people, in addition to their existing ordinary nil rate band of £325,000. We already know that the RNRB will increase by £25,000 each year until 2020, when it will reach £175,000, and that the ordinary nil rate band will be frozen at current levels until that time.
The RNRB will benefit individuals who have a “qualifying residence” to pass down to their “direct descendants”:-
“qualifying residence” meaning a property that, at some point, was that individual’s residence – this is not intended to apply to holiday homes or investment properties;
“direct descendants” meaning children and grandchildren but also stepchildren, fostered children and more - it does not however include nieces or nephews, siblings or parents.
Any transfers between spouses and civil partners are already fully exempt for Inheritance Tax purposes.
Just as with the ordinary nil rate band, the RNRB is transferable between spouses and civil partners, and so potentially, by 6 April 2020, a couple, owning a home worth at least £350,000, will have a combined Inheritance Tax allowance of £1 million.
There is no requirement for those inheriting the property to retain it and the RNRB will still be available even if the property is sold immediately after it is inherited.
It is also recognised that many people may have previously owned property and had to downsize during their lifetime, for example because they have gone into permanent residential care, and there are some protective provisions to account for this in form of “downsizing relief”.
Unfortunately, however as it currently stands those people who choose to rent, or wish to invest their money in assets other than property, who are unmarried or do not have any children or grandchildren, will not benefit from this allowance at all.
Also, those people with estates in excess of £2 million will lose out on £1 of allowance for every £2 that their estate exceeds that value.
There is no doubt however that the introduction of the RNRB will mean tax savings for many families, with there being a potential tax saving for a couple of up to £80,000 as of today, up to as much as £140,000 by 2020!
It is important therefore for those families who could potentially benefit from the RNRB to ensure that the terms of their Wills allow for this.
If you would like us to review your affairs or if you have any questions in general, please contact our expert Private Client team here and we would be delighted to help.
0131 525 8609