The way properties are judged for Inheritance Tax has changed.
On 6th April 2017, the new Residence Nil Rate Band (RNRB) was introduced. This new tax-free allowance is designed to enable parents to hand more of their estate over to their children without having to pay Inheritance Tax. Currently, an individual’s tax-free allowance means they do not pay Inheritance Tax on assets worth up to £325,000 – a total of £650,000 for couples.
The new RNRB – something which former Chancellor George Osborne announced – means an end to Inheritance Tax on the family home for a greater majority. It is essentially an extension to the current tax-free allowance, but applying solely to property. It initially stands at £100,000, but will increase by £25,000 per year over the next four years, until hitting £175,000 in tax year 2020/21.
In order to qualify for the RNRB, the estate must include a ‘qualifying property’ – basically a property that the deceased lived in at some point during ownership. That property must also pass to a ‘direct descendant’ – which not only includes children & grandchildren, but, unusually, step-children, past or current foster children, and children for whom the deceased was a Guardian at any time.
There are various restrictions however. It will not be available for people with no such ‘direct descendants’, and it cannot be left to any other family members – eg siblings, nephews / nieces. And if the value of the estate exceeds the limit of £2 million, the relief is reduced by £1 for every £2 over this limit.
While the new RNRB could save families a substantial amount of inheritance tax, things can become complicated if the property is held in Trust, as its availability will depend on the ‘type’ of Trust involved.
Why hold a property in Trust?
In some circumstances, Trusts can be very useful for people who want to cut their Inheritance Tax bill. By putting certain assets – like a property – into a certain types of Trust, they are not viewed as being part of your estate when the time comes to work out the amount of Inheritance Tax your loved ones will have to pay. While some forms of Trust will benefit from the RNRB, others will not.
The RNRB will only be available with the following Trusts:
- A Bare Trust for a lineal descendant
- An Immediate Post Death Interest Trust for a lineal descendant
- A disabled person’s Trust for a lineal descendant
- A bereaved minor’s Trust
- An 18-25 Trust.
Other Trusts will not benefit, for example if the property is left to a Discretionary Trust, the RNRB will not automatically be available, even if the beneficiaries of the Trust are lineal descendants. However, all is not lost in this situation, as post-death planning can be actioned within 2 years of the relevant death, to ensure the RNRB allowance is not lost.
As many such Trusts are used for asset preservation purposes, there is no need to panic and undo the careful planning already in place. You should though review your current provisions, to ensure they are fit for purpose, and take professional advice after death to ensure the right post-death provisions are enacted.
Working out exactly ‘who should get what, when and how’ after your death takes a lot of thought and planning. Using a qualified professional advisor to put in place a comprehensive Will – and help you keep it updated – is crucial.
Heir Tight Wills helps clients put in place robust provisions and valid documents – and keep them updated – to protect their loved ones and their assets both during their lifetime and after their death. For a FREE Consultation to discuss writing or updating your Will & estate planning provisions, contact Rachael Rodgers on 0845 519 7585, or CONTACT US via email.
