Why is this important?
Individuals subject to UK inheritance tax (IHT) currently have a tax-free allowance of £325,000. This ‘nil-rate band’ (NRB) can be transferred between spouses on death resulting in a potential tax free-allowance of up to £650,000 for surviving spouses.
From 6 April 2017, an additional tax free allowance (known as the ‘residence nil rate band’ (RNRB)) applies so that less IHT may be paid when the family home is left to descendents. Claiming the RNRB could enable an additional £100,000 to £350,000-worth of assets to pass to the next generation without a charge to IHT with potential tax free allowances for a surviving spouse reaching £1,000,000.
The terms of your Will can affect your ability to claim the RNRB. Therefore it is important to review your Will now (or make one if you have not already done so) to make sure that your family can benefit from the maximum available tax free allowance when you or your spouse or civil partner die.
- To benefit from the RNRB, your estate must:
- comprise a qualifying residential interest (i.e. your home) at the date of your death; and
- that residential interest must be ‘closely inherited’.
‘Closely inherited’ means that the house is inherited by your lineal descendants (children/grandchildren) and includes step and adopted children.
- If a couple own more than one property at their death then their executors can nominate which property will benefit from the relief and the RNRB is still available where an individual ceases to own a home (for example they sell their home to move into a residential care home) or downsizes to a smaller property.
- If a deceased person’s estate is valued at over £2,000,000 at the time of their death then there will be a tapered withdrawal of the RNRB at a rate of £1 for every £2 above the £2,000,000 threshold.
A husband dies in June 2017 leaving his entire estate worth £1.8 million to his wife. There is no inheritance tax liability and the husband’s full RNRB and his NRB is transferred to his wife. The wife then dies in June 2020 leaving her estate worth £2 million (which includes her primary residence) to be divided equally between her two children. Her estate will benefit from a NRB of £650,000 and a RNRB of £350,000, so a total relief from inheritance tax of £1,000,000.
Things to consider
- If you think that your estate will be worth over £2,000,000 at your death you may wish to consider how the value can be reduced below this level by effective succession planning.
- Who are you leaving your residence to in your will? Will you benefit from the RNRB?
- Keep records if you are selling your residence and are buying somewhere cheaper, or not buying anywhere else. We recommend keeping a copy of the sale contract with your Will.
Who will not benefit?
- Individuals who rent a property and invest all their capital, e.g. in shares / rental properties
- Individuals who do not have any children
- Partners who are not married or in a civil partnership will not be able to transfer any unused part of the RNRB (or their NRB) although they will still benefit from their own RNRB.