IN the midst of the hysteria surrounding the US elections at the end of last year, guidance from HMRC was quietly issued for the new Residence Nil Rate Band (RNRB) and the upcoming inheritance tax changes. The Government’s election pledge of 2015 to ‘increase inheritance tax thresholds to £1 million for married couples and civil partners’ is seemingly being met. From 6 April 2017 there will be a new RNRB for an estate where a person leaves their home, or a share of it, to direct descendants, such as children or grandchildren. This allowance, starting at £100,000 in 2017/18, will rise each year up to a maximum of £175,000 by 2020/2021 at which time it will increase in line with the consumer prices index.
The RNRB will be in addition to the existing nil rate band (NRB) of £325,000. Both allowances are transferable as between spouses or civil partners so that a couple benefit from the magic figure of £1 million (£175,0000 x2 plus £325,000 x2).
For the new RNRB to apply, the value of the property in your estate must be at least the amount of the RNRB exemption in that year. So, for the year 2017/2018 the property would need to be worth at least £200,000. In addition, you must have lived in it at some point. If you own more than one home, your executors can nominate which property should qualify for the relief. The property must pass to direct descendants. This includes children, grandchildren, step-children, foster children and adopted children. There are special provisions that apply where you sell your home to go into care or downsize to a less valuable property. When an estate exceeds £2 million then the rate of relief given by RNRB is reduced by £1 for every £2 above the threshold.
Make no mistake, the new rules are complicated and rules also have an impact on settlements by will and trusts. There has also been an outcry that childless couples will not benefit as they have no direct descendants and as a growing number of couples are childless this is a major disenfranchisement. Also, note that a couple who own a low value property will not be able to take advantage of this RNRB even if they have other assets which take the overall value of their estate to £1m.
The new rules provide a perfect platform for will and estate planning. Immediate things to consider would be to ensure that both spouses/civil partners are owners of a qualifying residential interest, with care being taken not to prejudice other circumstance such as loans or guarantees. Paperwork should be retrieved for all property owned now or in the past, particularly if there has been a large disposal. Wills should be reviewed to ensure that any property treated as a qualifying residential interest is left to direct descendants or a qualifying trust. If an estate is near the £2m mark then consideration should be given to making some lifetime gifts of assets that don’t qualify for the new RNRB relief. Given the complexity of the new rules, couples who own their home should take legal advice on how it will apply to them.
Increasing the Inheritance Tax threshold is a good thing, and increasing to £1m across the board would have been far simpler and the complex rules are complicated and discriminatory in parts. The changes are good news for practitioners and advisers as now more than ever, the public will need professional advice to ensure these new rules are utilised fully.
For more information, contact Borneo Martell Turner Coulston on 01604 622101 or visit the website www.bmtclaw.co.uk
By Isobel Mann
Solicitor
Borneo Martell Turner Coulston
