Will you Qualify for the Additional Inheritance Tax Threshold?

You may have heard that the rules around inheritance tax (IHT) are changing with regard to family homes.

From April a new allowance, the residence nil-rate band (RNRB), permits the further reduction of Inheritance Tax (IHT) on the sale of a family home.

Mark O’Neill of Jones Harris Chartered Financial Planners explains the new rules:

How much will it be?

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RNRB, will be introduced as an addition to the existing Inheritance Tax (IHT) rules. It will be phased in over 4 years by £25,000 each tax year until 2020:

Year Standard Nil-Rate Band Enhanced RNRB Total
2017/2018 £325,000 £100,000 £425,000
2018/2019 £325,000 £125,000 £450,000
2019/2020 £325,000 £150,000 £475,000
2020/2021 £325,000 £175,000 £500,000

Who can benefit?

The new allowance is available only when estates are directly inherited by:

  • a child (including adopted, step and fostered)
  • a grandchild
  • or other lineal descendant of that person
  • a spouse or civil partner of a lineal descendant (including widow, widower or surviving civil partner)

Estates above £2 million

Clients with large estates may not see any benefit from the extra nil rate band. For estates above £2 million the additional nil rate band will be tapered away by £1 for every £2 that the net value exceeds that amount.

Is the RNRB transferable?

Any unused nil rate band will be transferred to the surviving spouse or civil partner.

What if the family home passes into trust?

RNRB is only available for residential property that is given outright to descendants or to certain types of trusts, including those for bereaved minors and disabled people. As a result there may be problems in cases where property is being placed into a discretionary will trust for the benefit of the children or grandchildren. If your assets are held in a trust it is best to review this to ensure you qualify.

What about downsizing?

The family home doesn’t need to be owned at death to qualify for the allowance. Those who downsize or sell their homes on or after July 8 2015 would be able to “bank” their RNRB to be used against a smaller home or against the remaining value of their estate if they were passed on to their descendants.

For those with multiple residences

Only one home can qualify. It will be down to the personal representatives 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 (e.g. a buy-to-let), cannot be nominated.

As with all financial planning, professional advice should be sought. Contact Mark O’Neill on: 01253 874255 or email: mark.oneill@jones-harriscfp.co.uk.

This article has been written in general terms based on current legislation as at 23.05.2017 and therefore cannot be relied on to cover individual situations and should not be treated as financial advice. We recommend that you seek personal professional advice before acting on any financial decision.

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