Problems with the new ‘Residence Nil Rate Band’…

14 Jun Problems with the new ‘Residence Nil Rate Band’…

The new Residence Nil Rate Band (RNRB) that came into effect on 6th April is good news for many – but not for everyone.

In summary, the new tax-free allowance increases the inheritance tax (IHT) threshold of £325,000 per person by £100,000, rising to £175,000 in 2020. There are, however, a few complications that may mean you won’t qualify and it’s important to understand these, as they may affect how you structure your Will.

First of all, the RNRB only applies to a property that the deceased has lived in, and a qualifying share of it must be passed on to ‘direct descendants’.

If you have no direct descendants – which includes children, step-children, fostered or adopted children, or children for whom you were ever a legal guardian – then the RNRB doesn’t apply. You can still leave your property to siblings or nephews and nieces, but they won’t benefit from the RNRB, and their inheritance tax bill may be greater because of it.

The property needs to form part of your estate when you die. If you have gifted the property within seven years of your death then it won’t. The RNRB may be available in the event you have downsized or sold the property during your lifetime, but again there are strict and complicated conditions.

If you have more than one property, the RNRB can only apply to one of them. Your descendants can choose which one is to gain the benefit, but if you have a couple of low value properties, your estate may benefit from a smaller amount of RNRB than if you had one larger property.

At the other end of the scale, if your estate exceeds £2 million, the RNRB tapers away by £1 for every £2 over this threshold. The threshold this year is £2.2 million. Estates above this level will not benefit from RNRB.

It may be possible to reduce the value of your estate by making certain gifts, but you need to be careful when doing this as it could have adverse consequences. Alternatively, you could use Trusts to bring down the overall value of the estate. It may be worth considering leaving some assets into a Discretionary Trust to avoid the threshold being exceeded on the death of your spouse. However, if you plan to leave your property to your descendants via a Discretionary Trust, the RNRB again will not apply…

It sounds quite complicated – and it is – but a qualified Estate Planner can talk you through your options to structure your Will to take advantage of the tax benefits available to you.

Heir Tight Wills helps clients put in place robust provisions and valid documents, 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.