On 6 April 2017, the Residence Nil Rate Band For Inheritance Tax (IHT) came into force but it seems few of us know how to benefit from it, so here’s a useful overview.
With An Increasing Amount Of IHT Costing Us Billions Each Year, Will Your Estate Benefit From The Residence Nil Rate Band For IHT?
How To Reduce Your Estate’s Liability To IHT
It seems collectively, we’ll pay almost £2 billion more in IHT in the coming five years than previously estimated. The Office of Budget Responsibility now calculates the Treasury will collect a staggering £1.8 billion more than was forecast just five months earlier.
The change in numbers was buried in the body's twice-yearly analysis of the economy released alongside the Budget, so it wouldn’t be a surprise if you missed it. Rising house prices and a booming stockmarket were blamed, with the economy growing more quickly than expected.
This seems to be at odds with David Cameron’s election pledge:
We will take the family home out of IHT. That home that you have worked and saved for belongs to you and your family - you should be able to pass it onto your children.
To be fair, it’s only at the start of the 2017/18 tax year that earlier proposed changes will now begin to take effect. The key change is the Residence Nil Rate Band For IHT, which comes into force over the next three tax years from 6 April 2017. It’ll enable couples with a home to pass on up to £1 million to their direct family, free of IHT.
Before you check out five important things about the new Residence Nil Rate Band For IHT, here’s brief IHT summary.
A Brief Summary About Inheritance Tax (IHT)
- IHT is charged at 40 per cent on the portion of your estate worth £325,000 or more. Your surviving spouse can inherit your IHT allowance.
- 6 April 2017 saw the introduction of the Residence Nil Rate Band For IHT, better known as the "family home allowance".
- It’s worth £100,000 per person when passing on a main residence, in addition to the normal £325,000 per person allowance.
- It means you can pass on £425,000 without paying IHT, so long as it includes your family home and passes directly to children or grandchildren, and not via a discretionary trust.
- The new allowance will increase by £25,000 each year until it reaches £175,000 in April 2020. That will give you a £500,000 IHT allowance - £1m if you have a spouse or civil partner. On first death, any unused allowance will pass to the surviving spouse or civil partner.
- If your estate is worth £2 million, the Residence Nil Rate Band For IHT will be tapered, losing you £1 for every £2 over the threshold. If your estate is worth £2.2 million or more, you’ll have no allowance at all.
- The standard IHT Nil Rate Band is fixed at £325,000 until April 2021.
- You'll find more from the Government on IHT.
Five Areas Of Confusion About The Residence Nil Rate Band For IHT
A survey by Old Mutual Wealth discovered a distinct lack of knowledge and misunderstanding about the Residence Nil Rate Band For IHT. To help you make sense of it, here are five areas which have caused the most confusion.
1. You Can Choose The Property Against Which You Set The Allowance.
Residence Nil Rate Band For IHT can be applied to any property, inside or outside the UK, that you’ve used as a home. The property, or the value of the property must be included in your estate and within the scope of IHT.
2. The Allowance Will Apply Even If The Property Has Been Sold.
As the Residence Nil Rate Band For IHT can be utilised against the value of your former family home, it means that if you’ve downsized or sold out completely, you won’t lose out.
3. Any Outstanding Debts Are Deducted Before The Allowance Is Applied.
For Residence Nil Rate Band For IHT purposes, the figure to be used is the open market value of your property, less any liabilities, such as a mortgage, secured on it.
4. The Allowance Only Applied When The Property Is Left To Direct Descendants.
To qualify for the Residence Nil Rate Band For IHT, the property must be inherited by your child, grandchild or other direct descendent, or a direct descendent of your spouse or civil partner. This doesn’t include your siblings, nieces and nephews or other relatives.
5. The Allowance Will Rise Progressively Over The Next Four Years.
It’s set at £100,000 per person in the current tax year (2017/18). It will increase by £25,000 in each subsequent tax year until it reaches £175,000 in 2020/21.
Review Your Will For IHT Now
As this could have significant implications for those you leave behind, if you haven’t taken into account the Residence Nil Rate Band For IHT in your estate planning, it would be wise to review your Will and any relevant Trusts as a matter of urgency.
Otherwise you might end up contributing to the ever-increasing amount of IHT being collected from UK taxpayers.
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