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IHT Planning

Inheritance Tax (IHT) and the Residence Nil-Rate Band

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Recent changes to Inheritance Tax (IHT) legislation are certainly helping individuals to pay less tax on death, however it’s fair to say the system is slightly more complicated.

Last year, the government introduced a new allowance, the Residence Nil-Rate Band (RNRB) to reduce the impact of IHT on families and to make it easier to pass on their home to children and grandchildren.  The allowance applies where a residence is passed on death to a direct descendant.  The RNRB increased from £100,000 to £125,000 in April 2018 and will rise to £175,000 in tax-year 2020/21 when it will continue to rise in line with the Consumer Price Index.  One thing though, the RNRB cannot exceed the value of the home passed onto children and grandchildren.

The RNRB is different to the existing nil-rate band which applies to everyone and will remain at £325,000 until tax-year 2020/21.  Married couples and civil partners may transfer their assets to one another tax-free and the surviving partner can use both allowances.  This means that couples can pass on up to £650,000 in tax-year 2018/19. However, if the estate includes their home and is to be passed onto their children and/or grandchildren, they can pass on £900,000 when both RNRB allowances of £125,000 are included.  By tax-year 2020/21, they will be able to pass on up-to £1mn in assets tax-free.  Furthermore, the RNRB is available to anyone who has downsized, (or rightsized as we like to refer it as!) or ceased to own a home on or after 8thJuly 2015.

Some complications

Because the RNRB only applies to direct descendants, it does not apply to individuals with no children or to individuals who would like to leave their home to others not regarded as direct descendants.

Another complication is the tapered reduction in the RNRB at a rate of £1 for every £2 by which an estate’s value exceeds £2mn.  However, assets given away in the 7 years before death will not be included in the value of the estate when calculating the tapered reduction – this potentially encourages death bed tax planning to ensure one’s estate falls below £2mn!

Worth also adding that buy-to-let properties do not qualify if they have not been a residence of yours.

Final Thoughts

Despite the RNRB being welcomed by clients and their advisers, the number of individuals with an IHT liability continues to increase.

Estate planning is a key area where Wells Gibson can add value and is a core part of our Wealth Planning service – in fact, there are a wide range of effective IHT planning techniques at our disposal and these include gifting allowances, Potentially Exempt Transfers or PETs, trusts and Business Property Relief-qualifying investments.

As always, if you have questions and would like to discuss IHT further please contact us.