Granite guidance

Estate planning just got less taxing

The new Inheritance Tax (IHT) Residence Nil Rate Band (RNRB) was introduced on 6 April 2017.

It is in addition to an individual’s nil rate band of £325,000 and is conditional on the property being passed down to direct descendants, e.g. children, grandchildren. It will also be available to adopted, foster or step children.  

It will save as much as £140,000 in IHT when the family home passes to children on death.  

It is being phased in over 4 years and the full £175,000 allowance will not be available until April 2020.  

The RNRB will start at £100,000 and will increase by £25,000 each year until 2020.  

The rates will be £100,000 for 2017-2018, £125,000 for 2018-2019, £150,000 for 2019-2020 and £175,000 for 2020-2021.  

These are the maximum amounts and the allowance will reduce if the value of the property is less than this. The value of the home for RNRB purposes will be the open market value of the property less any liabilities secured on it such as a mortgage.  

The nil rate band will be frozen at £325,000 until the end of the 2020-2021 tax year and when combined with the full RNRB of £175,000 this will provide a married couple with the promised £1million nil rate band.  

The RNRB will be transferable between spouses and civil partners on death, in a similar way to the standard nil rate band.  It is the unused percentage of the RNRB from the estate of the first to die which can be claimed on the second death. 

Those with estates exceeding £2million may not actually benefit at all. The RNRB will be reduced by £1 for every £2 that the deceased’s net estate exceeds £2million.  

Therefore, a deceased’s estate exceeding £2.2 million in 2017-2018 tax year will find that they have no RNRB available. This will increase to £2.35 million in 2021-2022 when the full £175,000 allowance is effective.  

Protection will be provided If the family home has been sold due to downsizing or moving into a residential care home.  

The RNRB will still be available if the downsizing or disposal of the property is after 8 July 2015 provided that the property disposed of was owned by the individual and it would have qualified for RNRB had it been retained by the individual.  

The replacement property or assets must form part of the estate and pass to descendants.  

Only one residential property will qualify and any properties which were never a residence of the deceased such as buy to let properties cannot be nominated.  

Whilst the new rules are to be welcomed inheritance tax planning remains as complex as ever and guidance should be sought from a suitably qualified professional who specialises in this area. 

Paul Gibson is a Chartered Financial Planner and Managing Director of Granite Financial Planning who operate in Aberdeen and Banchory. He can be contacted on 01224 781280. 

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