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How effective is your inheritance tax planning?

Monday 15 February, 2016

Inheritance Tax – Existing Nil Rate Band (NRB) & Residential Nil Rate Band (RNRB)

The existing nil rate band (NRB) is a very important feature of current inheritance tax planning. Inheritance tax (IHT) is paid at 40% on any assets over the NRB of £325,000, when they are passed to anyone, other than a spouse or civil partner or charity.

An estate can pay IHT at a reduced rate of 36% on some assets (instead of 40%) if 10% or more of the 'net value' of their estate is left to charity. The net value of an estate is the total value of all the assets after deducting debts and liabilities.

The current NRBs of married couples can be added together to shelter £650,000 (£325,000 x 2). Spouses can also leave their estate to someone else and make use of their NRB.

The existing NRB will remain at £325,000 until the end of 2020 to 2021.

Making use of the new Residential Nil Rate Band (RNRB)

Announced in the Summer Budget of 2015 the government are introducing a new RNRB that will help anyone further mitigate their inheritance tax so long as they own a main residence and have direct descendants.

This measure introduces a RNRB when a residence is passed on death to a direct descendant. This will be:

Ø  £100,000 in 2017 to 2018

Ø  £125,000 in 2018 to 2019

Ø  £150,000 in 2019 to 2020

Ø  £175,000 in 2020 to 2021

It will then increase in line with Consumer Prices Index (CPI) from 2021 to 2022 onwards. Any unused RNRB will be able to be transferred to a surviving spouse or civil partner.

The RNRB will also be available when a person downsizes, or ceases to own a home, on or after 8th July 2015 and assets of an equivalent value, up to the value of the RNRB, are passed on death to direct descendants.

There will be a tapered withdrawal of the RNRB for estates with a net value of more than £2 million. This will be at a withdrawal rate of £1 for every £2 over this threshold.

The qualifying residential interest will be limited to one residential property but personal representatives will be able to nominate which residential property should qualify if there is more than one in the estate.

A property which was never a residence of the deceased (such as a buy-to-let property) will not qualify.

A direct descendant will be a child (including a step-child, adopted child or foster child) of the deceased and their lineal descendants.

Therefore after 2020 a married couple could potentially pass on a £1,000,000 family home to their children without paying IHT.

If a spouse dies before the introduction of the RNRB in April 2017, the remaining spouse will be able to make use of their partner’s RNRB if they survive on or after 6th April 2017 irrespective of when the first of the couple died.

Allan Ross Independent Financial Adviser in Ware said:

‘This is very good news for a lot of people concerned about having to pay more and more IHT with house price increases. The introduction of the new RNRB from April 2017 will help many couples avoid paying inheritance tax altogether.  However, I would advise clients to review their Will in 2017, (if not every year!) when the new RNRB is introduced, especially if they have already set up a Discretionary Will Trust with their solicitor. Nobody knows yet whether HMRC will recognise money going in to a Discretionary Will Trust as qualifying for the new RNRB. To qualify for the RNRB an estate has to be inherited directly by a descendant, and a Discretionary Will Trust isn't direct (and a descendant may not be the named beneficiary).’

Other things you should consider when you are inheritance tax planning:

  1. Make sure you have an up to date Will!
  2. If you are married you can preserve the NRB on the first death and use both bands on the second death. 
  3. For unmarried couples any transfers are not possible so you should use both NRBs on death. To do this may involve splitting your estate.
  4. Any estates worth over £2.2 million in 2017/18 will not be entitled to receive the residential nil rate band.
  5. Certain businesses may not have to pay inheritance tax if they claim business property relief.
  6. Take your time making decisions. You don’t have to do everything all at once!

Allan Ross Independent Financial Adviser Ware said:

’Anyone with an estate worth over £2 million should think carefully about inheritance tax planning as there are many things that can be done now to reduce the tax burden for your dependants.  You can gift cash, investments and property, or place assets in trust up to £325,000 (without having to pay further immediate tax). If you survive seven years after making the gift there will be no inheritance tax to pay. You can also consider whole of life policies in trust and more sophisticated solutions such as taking advantage of business property relief rules. Other couples who have divorced or re-married may also have complicated inheritance tax positions, so we recommend they seek financial advice in order to make full use of the nil rate bands. Like all matters when it comes to financial planning it normally involves a blend of solutions. Not all of them will be appropriate so consider all options first.

Though it is good news for families with a main residence and direct descendants it isn’t such good news for couples who don’t have any children. With the NRB frozen until 2020-2021 and house prices continuing to increase they will be negatively impacted through no fault of their own. They should definitely review their situation with regards this matter.’

Review our Estate Planning Services.  Lonsdale Services operate offices in St Albans, Barnet, Harpenden, Leeds, Stafford, and Ware supporting a variety of wealth management and employee benefit clients across the United Kingdom.

Please note the Financial Conduct Authority does not regulate Estate Planning.

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