Navigating inheritance tax

March 5, 2019

Elizabeth Gibbison, solicitor at Hay & Kilner Law Firm, outlines the rules around residence nil rate band, which need careful consideration to ensure beneficiaries of your will don’t one day receive an unexpected inheritance tax bill

Inheritance tax has been a highly visible political and legal issue recently, and the steep rise in the value of the average UK home over the last few decades has further sharpened the focus.

According to the latest Government figures, the average house in the UK is now valued at £230,630, which is a good deal along the way towards passing the £325,000 inheritance tax ‘nil rate band’ threshold.

A 40 per cent levy will be due on any assets you leave exceeding this amount, but since the introduction of the residence nil rate band (RNRB) in April 2017, you may be able to avoid including the value of your property in these calculations if you’re leaving it to ‘direct descendants’.

The RNRB was brought in to enable families to retain the family home, or its cash equivalent, without the burden of inheritance tax to pay at what is already obviously a very difficult time for them.

Single people may qualify for an additional £125,000 that can pass inheritance tax-free under these rules, an allowance which is doubled for
a couple, and by April 2020, this increases to £175,000 per person gradually.

If the value of your home is worth less than the maximum amount available, then the RNRB available to you will be capped at that value.

You may be eligible for this relief even if you don’t have blood-related children, as a ‘direct descendant’ is widely defined and includes a
wide range of relatives, such a child, stepchild, grandchild, past or present foster child, a husband, wife or civil partner of a lineal descendant (including their widow, widower or surviving civil partner).

In addition to this, if your home has been sold or gifted on or after July 8, 2015 (or will be sold or gifted in the future), you could still claim some or all of the RNRB as long as it can be proven that you occupied the home as a residence, even if only for a short time. This is useful to know if you have owned more than one property and want to maximise the relief as you can choose which one to apply the RNRB against, provided the conditions above are met.

If your estate is worth over £2 million, the RNRB will not be fully available as it is reduced by £1 for every £2 that the estate is valued over £2 million. This means, at today’s rates, that you will lose all the RNRB if your estate is worth £2.25 million or more. If you have a ‘mixed bag’ of assets, some of which qualify for reliefs for inheritance tax purposes, which can be claimed on agricultural or business assets via agricultural property relief (APR) and business property relief (BPR), then the application of the RNRB is slightly more complex.

The value of your estate includes all assets (ignoring any reliefs when calculating available RNRB), so while any business or farming assets will hopefully pass free of inheritance tax due to APR or BPR, the value of those assets may result in some or all of the RNRB being tapered away.

If this is the case, RNRB will not be available to offset against your other non-business/non- farming assets which are not eligible for reliefs.

Residence nil rate band won’t cover the value of all family homes, but the majority will at least be covered in part and this additional relief has been a welcome addition to mitigating inheritance tax for many.

If you’re considering how best to manage your estate, it makes clear sense to speak to a trusted adviser about the RNRB about how the rules apply to your individual situation.

Hay & Kilner
www.hay-kilner.co.uk

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