New law: Homeowners start planning for significant new inheritance tax rules
Tuesday 16th February 2016
Homeowners potentially liable to inheritance tax (IHT) need to plan whether and how to take full advantage of upcoming changes to the IHT rules due in April 2017, which could significantly reduce the IHT payable on death.
If your net assets on death are worth more than the IHT 'nil rate band' – currently £325k – IHT is payable on the excess over that sum at a rate of 40 % (subject to exemptions and reliefs).
No IHT is payable on anything you leave to your spouse or civil partner when you die. However, if you leave everything to your spouse or civil partner this means you have not 'used up' your nil rate band. Under the IHT rules, in those circumstances any unused part of your nil rate band can be added to your spouse or civil partner's own nil rate band when it comes to calculating IHT on their death.
The Chancellor of the Exchequer has announced an important way to further reduce your IHT liability. From 6 April 2017, there will be a new 'residence nil rate band' (RNRB) under which a significant part of the value of your residence will be exempt from any IHT charge, provided:
You leave your residence to your 'direct descendants'
Your estate is £2m or less
Initially, the RNRB limit will be set at £100k – rising by £25k per year, up to a maximum of £175k in 2020/2021. For example, if you die on 7 April 2017 and leave your residence to your children, no inheritance tax will be payable on the first £100k of its value.
If you do not use up all or any of your new RNRB the unused part can – like the existing nil rate band - be used to reduce IHT payable by your spouse or civil partner when they die. They can add it to their own RNRB if they leave their residence to direct descendants.
A direct descendant includes children and grandchildren (including step- or adopted children), and their spouses, civil partners, widows or widowers provided they have not remarried. The new relief will also apply to certain types of family trust holding residential property.
The Government has yet to define 'residence' for these purposes but a property you have never lived in will not qualify. Properties that you lived in but later let out may still qualify. If you own more than one residence your executors can choose which one the RNRB applies to. However, the RNRB cannot be spread over more than one property so, if you have two residences and both are worth less than £175k you will inevitably lose part of your RNRB.
If the net value of your total estate exceeds £2m (before taking advantage of IHT exemptions and reliefs), the RNRB will decrease by £1 for every £2 by which it exceeds that sum.
If you leave your residence to your direct descendants, you can only claim the RNRB up to its actual value – you will lose the remaining part of the RNRB. However, if you have downsized and your previous residence was worth more than your current residence (or you sold a former residence and do not now own a residence), your executors will be able to go back for a specified period, and calculate how much RNRB is available by reference to the value of your previous residence.
The Government has not announced how far back you will be able to go, but it is unlikely to be before 8 July 2015 when the new RNRB was first announced.
6 April 2017
Homeowners should consider whether to make a new Will to take advantage of the new RNRB to reduce IHT payable on death, particularly if they plan to:
Let their home
No longer have a home (eg because they plan to rent or live with relatives or friends), or
Leave their residence to anyone other than direct descendants or spouses/civil partners
Those with estates worth more than £2m may wish to consider making lifetime gifts to reduce the size of their estate
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