Have the Government really given us all £1Million tax free allowance on death?
It is a common misconception, since the introduction of the Main Residence Nil Rate Band (RNRB) in the Summer Finance Bill of 2015, that couples will by the year 2020 be able to leave an estate on death worth up to £1million before Inheritance Tax will become payable. Whilst this may be true for some couples, the rules relating to the RNRB are complicated and many will not benefit from the full allowance.
The RNRB will be phased in gradually between 6 April 2017 and 6 April 2020 as follows:
- £100,000 for tax year 2017/18
- £125,000 for tax year 2018/19
- £150,000 for tax years 2019/20
- £175,000 for tax year 2020/21
The standard Nil Rate Band will be frozen at £325,000 until the end of 2020/21.
As with the standard Nil Rate Band, any RNRB which is not used on the first death can be transferred to a surviving spouse or civil partner.
On the face of it therefore, in 2020/21 an individual will have a combined Nil Rate Band available of £500,000 and couples £1million before Inheritance Tax (IHT) becomes payable on their estate.
However, the RNRB can only be offset against the value of the deceased’s interest in a property, which at some point has been occupied by the deceased as their residence. Subject to a few limited exceptions, the property must be left on death to direct descendants of the deceased, which means a child (including step-child, adopted child or foster child) of the deceased and their lineal descendants.
- A person who dies with no direct descendants will not be able to benefit.
- People who do not own their own home, or have given it away during their lifetime (save for some limited exceptions), will not be able to benefit.
- An estate left equally between the deceased’s unmarried partner and the deceased’s children is unlikely to qualify.
- An estate left to the deceased’s children, with a substitutional gift to grandchildren contingent upon reaching a certain age e.g. 21 years may not qualify in part if a child predeceases and the grandchildren have not reached the age of entitlement.
- A Will giving the deceased’s unmarried partner a right to occupy the property for life, passing to the deceased’s children when the right of occupation ends, will not qualify.
There are other issues which will need to be considered and your own personal circumstances will dictate whether your estate can benefit from the RNRB or to what extent. For those who can benefit from the RNRB, care should be taken to ensure that your Will is drafted correctly to ensure the maximum benefits gained.
Jeanette Berry heads up the Private Client team at Southerns and is an expert in LPA’s, wills, probate, trusts and estate planning. For further advice on this issue and wealth preservation in general please contact Jeanette Berry or her team on 01282 422711 or email her – email@example.com.