It’s as far back as 2015 now that George Osbourne announced plans to introduce a new allowance to help reduce the amount of Inheritance Tax paid on death. It was lorded as the £1m Nil Rate Band when first mentioned by the Conservatives back in their Party Conference in 2007 and eventually came into existence at the beginning of the 2017/18 tax year, but does it really mean you can pass on £1m to your chosen beneficiaries? Let’s take a look.
How does the new Residence Nil Rate Band (RNRB) work?
In the 2017/18 tax year the new additional RNRB allowance came into force with a value of £100,000. At the start of this new tax year it rose to £125,000. It is then due to rise further as follows:
2019/20 : £150,000
2020/21 : £175,000
This means that by the 2020/21 tax year, the maximum tax-free allowance for a married couple of those in civil partnerships could be:
Nil Rate Band from second death (£325,000) + Transferred Nil Rate Band from first death (£325,000) + Residence Nil Rate Band from second death (£175,000) + Transferred Residence Nil Rate Band from first death (£175,000) = £1 million
Unfortunately, those whose spouses or civil partners died before 6 April 2017 cannot claim a transferred Residence Nil Rate Band, and if any part of the standard Nil Rate Band were used on first death, maybe by passing individual legacies to others, this reduces the amount transferred to the survivor for their use.
Additionally, as the Residence Nil Rate Band is focused upon the property you own and have as your main residence, or if you own more than one, the property which your executors may elect as such, it starts to become somewhat confusing.
Add to this that the property can only pass to a lineal descendent, so a spouse or qualifying child, and it becomes more important to arrange your affairs in your lifetime, to maximise the use of the allowance.
Does everyone qualify?
Only if you have an estate worth less than £2.25 million do you qualify for all or some of the RNRB in 2018/19 (rising to £2.7 million in 2020/21). All estates, on death, which total more than £2m are subject to tapering, which in simple terms means that for every £2 over £2m, you lose £1 of the RNRB.
So, it’s all quite confusing with different exemptions and complications which make planning advance the only real solution. Revisiting Wills is a must; taking sound financial advice is also key to ensuring your understanding of the rules, how you are likely to sit within them and what you can do to make the most of them, whilst protecting your estate from unnecessary taxation. Remember “Inheritance Tax, is broadly speaking, a voluntary levy paid by those who distrust their heirs more than they dislike the Inland Revenue.” Former Chancellor of the Exchequer, Roy Jenkins, 1986, so assuming you prefer to minimise taxation, legitimately where you can, get in touch.
Mark Ireland Chartered ALIBF
This information is provided strictly for general consideration only. No action must be taken or refrained from based on its contents alone. Accordingly, no responsibility can be assumed for any loss occasioned in connection with the content hereof and any such action or inaction. Professional advice is necessary for every case. Based upon our understanding of UK tax law at May 2018. The value of investments can fall as well as rise and you may not get back the full value of your investment