Inheritance Tax & Your Home – the new rules

On 6th April 2017 the rules for Inheritance Tax (IHT) changed.  Home owners may be eligible for an additional allowance known as the ‘residence nil rate band’ (or ‘RNRB’).  Although welcomed by many tax specialists and lawyers, the laws in this respect are quite complex and all home owners should seek advice.  Ben Holden, a solicitor who specialises in this field answers your questions

What is the current threshold for IHT?

£325,000.00 and it has been set to remain at this level until at least 2019.  If, for example, the sum total of all your assets is worth £425,000.00 the first £325,000 would be taxed at 0%.  This is known as the ‘nil rate band’ (NRB).  The balance of £100,000 falls into the 40% tax band, giving HMRC £40,000.

Is it any different if I own a home?

Yes.  Since April 2017 the RNRB can be added to the NRB for homeowners.  The threshold for the RNRB is £100,000 in the tax year 2017-18; £125,000 in 2018-19, £150,000 in 2019-20 and £175,000 in 2020-2021.  From April 2020 your property and assets will have to be worth in excess of £500,000 before tax is payable – the NRB at £325,000 + RNRB at £175,000 = £500,000.

Is it really that straightforward?

No.  It sounds obvious but you must own or have an interest in a home for this to apply.  The RNRB is only applicable against the value of your home.  For example, if you die in May 2020 the RNRB will be £175,000.  If your property is worth £150,000 you will have lost £25,000 of tax free allowance.  You will not be able to apply that allowance to the rest of your estate.

The property must also pass to your descendants e.g. children, step children, adopted children and/or foster children.  It is possible for grandparents to leave their estate to grandchildren but the RNRB could be lost if an age condition is included in the Will – “e.g. to my grandchildren at 25 years”.

The meaning of ‘descendants’ for these purposes does not include brothers and/or sisters (or nephews/nieces) or children of a cohabiting partner (if you are unmarried).

Is there a limit on the RNRB?

Yes.  If your entire estate is worth more than £2m the RNRB applicable will reduce by £1 for every £2 you are over that threshold.  If you are worth £2.2m and die in May 2017 then your RNRB will be reduced to zero.

What if I downsize?

You will be covered if you decide to downsize e.g. move to a property of a lesser value or cease to own a property altogether.  You must have owned the original property on or after 8th July 2015.  If this applies to you, your estate will be given a credit equal to the value of your previous property, but you will be limited to one RNRB.  For example if you sold a property worth £200,000 and bought a property worth £90,000 and died in May 2017 you would only be able to apply a further £10,000 from your previous property.  £10,000 +£90,000 = £100,000.

Can married couples combine their residence nil rate band?

Yes.  Very much like the general NRB the RNRB is transferable from spouse to spouse.

What if the first spouse dies before April 2017?

This does not matter.  So long as the second spouse dies after this point both RNRBs are available.

Does the RNRB apply if my property goes into a Will Trust?

The law in this area is far from straightforward.  The general answer is no.  However, if a spouse has an interest for life, or if the property is held until a child reaches 25 years or if it is held for a disabled child it is possible for the RNRB to apply.

The RNRB could be lost if you leave your home (or your overall estate) to grandchildren on the condition that they reach a certain age.  Many Wills include such trusts particularly if a child dies before a parent.  You may need to change your Will should you wish to rely on the RNRB.

Those who have a Nil Rate Band Discretionary Will Trusts should also review their Wills.  These types of Will Trusts were typically made with tax planning in mind.  Those who still have a Nil Rate Band Discretionary Trust will be interested to learn that they could risk losing the RNRB and should seek urgent legal advice.

What should I do next?

For the vast majority of home owners this should result in a review of their affairs.  Speak to a solicitor who specialises in this area.  If the RNRB is not claimed your loved ones could be losing out by paying unnecessary amounts of Inheritance Tax.

 About the Author

Ben Holden is a Solicitor, Director and Head of the Wills and Probate Department at Donnelly & Elliott Solicitors in Gosport.  He has over a decade of experience in dealing with elderly client matters.  Ben and his team pride themselves on taking the time to understand their clients’ needs whilst offering cost effective legal solutions. Ben is a member of the Society of Trust & Estate Practitioners and a full accredited member of Solicitors for the Elderly.

As part of their commitment to excellence in this field, Donnelly and Elliott Solicitors are proud to be accredited members of the Law Society’s Wills & Inheritance Quality Scheme

 

 

 

 

 

 

 

 

 

 

 

Date: May 2017. Donnelly & Elliott Limited Solicitors|38 Stoke Road Gosport Hampshire PO12 1JG |02392 505 500| www.gosport-solicitors.co.ukImportant Note: The above information is for general guidance and in part forms the opinion of the author. It is based on the law as at the date of this note. It should not be relied upon in part or in whole as a substitute for independent legal advice.  If any of the issues raised in this article effect you please contact a member of our team.

Donnelly & Elliott Limited is a law firm authorised and regulated by the Solicitors Regulation Authority. © Donnelly & Elliott - All rights reserved.