It was 2007 when the Conservatives made a manifesto pledge to introduce inheritance tax (IHT) allowances of £1 million for married couples. Nearly ten years later, new IHT rules will come into force next year. From 6th April 2017, in addition to the existing IHT allowance for £325,000 per individual, there will now also be an additional Residence Nil Rate Band (RNRB) available when a residence is passed on death to a direct descendant. The new RNRB will start at £100,000 for 2017/18, increasing £25,000 per year up to £175,000 for 2020/21 and increasing in line with the Consumer Prices Index thereafter.
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. The existing NRB will remain at £325,000 until 2021.
Sounds simple enough, doesn’t it? Well yes it is……and no. As ever there is some devil in the detail.
The main areas that will need to be carefully checked are whether your beneficiaries fall into the definition of Direct Descendants. Many wills that contain trust arrangements will need to be reviewed to check entitlement to the RNRB. People leaving their estate to beneficiaries who aren’t Direct Descendants will still need to look at alternative tax planning options.
For estates valued in excess £2 million (after liabilities but ignoring reliefs) there will be a tapered withdrawal of the RNRB at the rate of £1 for every £2 over the £2 million threshold. This could particularly affect estates with high property or land values and estates with significant business interests, and may in some cases cause a reversion to the practice of using the tax allowances on the death of the first spouse so as to “bank” entitlement to RNRB and reduce the estate of the second spouse.
The introduction of the RNRB may benefit many people, but it is best not to simply assume that you will be one of them. The new IHT rules are far from straightforward and it has never been more important to seek expert professional advice.
Director specialising in Wills, Trusts & Probate, Tinsdills Solicitors