Jonathan Smith
Director of Tax
It’s time to think about how you leave your estate to your descendants.
From 5 April 2017, the new Inheritance Tax Residential Nil Rate Band (RNRB), announced in the 2015 Summer Budget, will be phased in.
The current tax-free inheritance allowance of £325,000 will be increased gradually over the years, by £100,000 for deaths after 5 April 2017, and then by a further £25,000 each April until 2020/21.
The extra allowance is only available if the deceased’s interest in a residential property – which has been his or her main residence – is included in the estate and is left to one or more direct descendants (a child, including stepchild, adopted child or foster child, or grandchild) on death.
Therefore, this would exclude a property that has always been a buy-to-let investment, but could include a property that has been a residence of the deceased in the past but was let at the date of death. It could also conceivably apply to a property acquired and occupied as a residence shortly before death, with the deceased having always previously lived in rented accommodation.
The RNRB allowance will be the value of the interest in the property (after any liabilities such as a mortgage have been deducted), up to the maximum amount of the band. This means that after 5 April 2020, the total tax-free inheritance allowance could be up to £500,000. If the estate is left to a surviving spouse or civil partner, this increases to a joint allowance of £1 million upon their death.
The much-publicised £1 million exemption will not be available until a second death after 5 April 2020 – and only then on estates worth £2 million or less. However, if the value of the estate (after deducting liabilities but before reliefs and exemptions, such as Agricultural Property or Business Property) exceeds this, the RNRB is progressively withdrawn, by £1 for every £2 over the £2 million limit. This effectively means that for a first death after 5 April 2020, there will be no RNRB available if the net value of the estate exceeds £2.35 million. This figure rises to £2.7 million on the death of a surviving spouse or civil partner when a full transferable RNRB is available.
The perception early on was that the new legislation would encourage people to hang on to their properties and not downsize, which could have a negative impact on the housing market. This has been addressed by an amendment in the Finance Bill 2016 so that, if part of the RNRB might be lost because the deceased had downsized or ceased to own a residence on or after 8 July 2015, that part will still be available as long as the smaller residence, or assets of equivalent value, are left to direct descendants.
For clients who own two or more residences that might all qualify for the RNRB, thought should be given to when those properties are left to children or grandchildren. If it is likely that one spouse will die before 5 April 2017 but the other will survive past that date, the first to die could leave a share of the residential property to children or grandchildren on their death (within the standard nil-rate band) because their survivor will obtain a full transferable RNRB. For those whose estates are significantly more than £2 million, so there is a good chance that the RNRB will be reduced, they could consider making lifetime gifts to reduce the value of their estate below £2 million.