April 2017 saw a huge change to the law on inheritance tax (IHT) with the introduction of the new Residence Nil Rate Band (RNRB).
An individual in the UK has a basic Nil Rate Band (NRB) of £325,000 and for people who are married or in a civil partnership this can be transferred between spouses to give £650,000 on the second death. The RNRB can now be claimed in addition to this and allows people to pass on a property to their children or grandchildren.
Like the basic NRB the Residence Nil Rate Band is also transferable and will be phased in over four years; starting at £100,000 in 2017/18, rising by £25,000 per year to reach £175,000 by 2020/21. Therefore by 2020/21, a married couple will be able to combine their basic NRB and RNRB allowances to pass on an estate worth £1 million before IHT is payable.
However, the new allowance is only available subject to strict criteria and so anyone who has made a Will should seek advice from their solicitor to ensure their estate planning is still relevant in light of the changes.
The RNRB is only available in relation to property being inherited by direct descendants, which includes children and grandchildren, as well as stepchildren, adopted and foster children. This criteria flags up three main issues for clients to consider:
- The allowance can only be used in respect of a limited part of your estate, a property
- If you have no direct descendants to pass your property to you will not be eligible to benefit from the new allowance
- The property must be inherited by the descendants, meaning they must become absolutely entitled to this part of the estate
Trusts, particularly discretionary trusts, have long been used by clients for flexible estate planning and protection of assets and as such many still exist. However, the criteria for the new RNRB excludes the majority of trusts, including discretionary trusts from being eligible because assets held are technically owned by the trust and controlled by the trustee rather than the direct descendants as beneficiaries. Some types of trusts can qualify such as those for disabled beneficiaries.
Only one residential property will qualify for the RNRB, which your personal representatives can choose and this will allow them to maximise the allowance. However, the property must have been used as a residence by the deceased at some point for it to qualify. Therefore buy-to-let properties that have always been rented out cannot be considered.
Clients should also be reviewing their estates as a whole because in the event an estate is worth more than £2 million the RNRB allowance will be reduced. The reduction is by £1 for every £2 the value of the estate exceeds the £2 million threshold.
The criteria at first glance are stringent and in some ways unfair, particularly for those who have no children. In other ways the new rules surrounding the RNRB are flexible, for example the property in question does not have to be a main residence, as under the rules in relation to Capital Gains Tax, this allows holiday homes to qualify, as long as the deceased has lived there at some point in their ownership. The new legislation also provides for circumstances in which clients sell their home prior to death or downsize, allowing them full use of the allowance.
Emma Green, Solicitor says “Wills should always be viewed as working documents which need to be reconsidered in light of changes to family circumstances and changes in the law. The introduction of the RNRB is the biggest development in the law in relation to IHT for some time and Wills which have been made previously should be considered in light of the new law.”
To review your Will or discuss your circumstances and find out how we can help, speak to one of our specialists today.