How to save your family £140,000 in inheritance tax
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Financial advisor Graham Hearnden from Trust Matters explains what the residence nil rate band allowance is and how parents can reduce inheritance tax when leaving property to their direct descendants.
The residence nil rate band can be a complicated topic to get to grips with, but it can help you save hundreds of thousands in inheritance tax and make it easier to pass on your estate to loved ones.
What is the nil rate band?
Each person has their own nil rate band (NRB), which is currently £325,000. This means that the first £325,000 from their estate can be passed on tax free. Married couples and civil partners will have a combined nil rate band of £650,000.
The inheritance tax rate is charged at 40 per cent on the part of your estate that exceeds this amount
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What is the residence nil rate band and how does it work?
The residence nil rate band (RNRB) came into force in April 2017 and works as an additional amount on top of the NRB. The RNRB gives you an extra allowance if you pass a residence to your direct descendants (as long as you have lived in the property at some point).
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The residence nil rate band is currently £125,000 per person, rising to £150,000 in April this year. It will increase by a further £25,000 in April 2020 when it will reach £175,000 per person. The threshold will continue to increase in line with inflation based on the Consumer Price Index.
Married couples can achieve a potential inheritance tax threshold of £1 million (£325,000 x2 + £175,000 x2). However, it is worth bearing in mind that there are complicated criteria to qualify for the allowance.
Do I qualify?
The RNRB applies to people who leave a residence (that they have lived in at some point) to direct descendants on death. Direct descendants include children and grandchildren (including adopted, fostered and step-children).
What happens if I downsize?
In order to qualify for the RNRB, the family home does not need to be lived in or owned at death. For example, if you decide to downsize or sell your property to move into a care home or relative’s home, the RNRB will still be available to you as long as the property would have qualified for the additional threshold if you had kept it. The proceeds from this sale must still be passed to direct descendants on death in order to qualify. This is sometimes known as the downsizing addition.
However, the RNRB can be complicated to apply if you have downsized or sold your property, so it is a good idea to seek professional advice.
What happens if my estate exceeds £2 million?
If you have an estate which is worth more than £2 million, you will not benefit from the full RNRB. The RNRB will be subject to a tapered withdrawal and you will lose £1 of allowance for every £2 over the threshold. This means that currently if your estate exceeds £2.25 million (£2.5 million for married couples) you will not qualify for any RNRB. This will rise to £2.35 million (£2.7million for married couples) in April 2020 when the allowance is £175,000.
Is it transferable?
Just like the NRB, the RNRB can be transferred to a surviving spouse or civil partner on death. The unused percentage of the RNRB from the estate on the first death can be claimed on the second death, regardless of when the first person died.
The transferable residence nil rate band must be claimed within two years at the end of the month the second death occured.
What if my home is held in a trust?
If the family home has been placed into a discretionary trust or you were planning to do so on death, you risk losing your entitlement to RNRB, even if the beneficiaries are children or grandchildren. If you have placed your property in a trust and are unsure whether you still qualify, you should seek advice from a specialist.
Do I need to re-write my will to qualify?
When estate planning, it is a good idea to review your will on a regular basis to ensure that there are no legislative changes that might have an effect on the desired distribution of your estate. You should review your will if the value of your estate exceeds your NRB and you want your direct descendants to benefit from the RNRB. If you miss out on the RNRB, your descendants could be paying up to an extra £140,000 in inheritance tax.
Who can help reduce inheritance tax on property?
If you need help organising your estate, you can get professional advice from financial advisors who specialise in inheritance tax, such as St. Albans-based firm Trust Matters. The business has extensive experience in estate planning and prides itself on building long-lasting relationships with clients. They can tailor their services for your particular situation and help reduce the amount of inheritance tax payable by your beneficiaries.
Find out more
Trust Matters will be holding seminars on March 28 and April 3, where you can find out more about the RNRB and inheritance tax planning.
Jeffrey Cohen, who has worked with Trust Matters for more than 25 years, will be presenting on the subject. Jeffrey was recently voted the UK’s Tax Solicitor of the Year for the second consecutive year and specialises in tax and trust law, including estate and inheritance planning.
This exclusive event will take place at their St. Albans office at Hill House, 5 Holywell Hill, AL1 1EU.
For more information, or to book your place at the upcoming seminars, email firstname.lastname@example.org or call the St. Albans office on 01727 737610. Alternatively, visit trustmatters.co.uk.