New inheritance tax legislation came into being on April 6th 2017 giving people potential extra property allowance. This post explains the changes so you can ensure your family benefits ...
“Inheritance tax can cost loved ones hundreds of thousands in the event of your death, yet it's possible to legally avoid huge swathes of it, or possibly pay none at all.”
Sam McFaul, Money Saving Expert
As Money Saving Expert points out, planning how to deal with inheritance tax is the single biggest money saving thing you can do.
In view of the phased introduction of the residence nil rate band (RNRB) allowance over the next three years, this, perhaps, has never been truer. Why? Because, by 2020, this new allowance will enable couples in the UK with a home to pass on up to £1million (and single people with a home to pass up to £500,000) to direct family members, free of inheritance tax.
How this new allowance is to be introduced — and therefore how people can make the most of it — is though, somewhat befuddling. Here are 7 things you need to know about these inheritance tax changes to help you plan your estate.
1. THE BASIC ALLOWANCE IS UNCHANGED
The current inheritance tax threshold of £325,000 per person remains unchanged. So couples can still pass on £650,000 and single people £325,000 before they have to start paying 40% inheritance tax on their estate.
What has changed is the addition of a new RNRB, which by 2020 will allow you to pass on your main residence, if it is worth less than £1million, to a direct descendent inheritance tax free.
This new allowance is being phased in (see point 6 below).
Your estate plan should take this gradual introduction into account.
2. IF YOU HAVE MORE THAN ONE HOME, YOU CAN SELECT WHICH TO SET RNRB AGAINST
RNRB can be applied to any property (in or outside the UK) that has been used as a home by the deceased if it is within the RNRB scope (see points 6 and 7 re what happens with properties worth more than £1 million) and the property or the value from the property is included in the person's estate.
RNRB works out the value of this home as its open market value minus any liabilities, such as a mortgage.
RNRB can only be set against one property.
3. RNRB APPLIES EVEN IF YOU'VE ALREADY SOLD THE PROPERTY
People who have downsized or even sold up and come out of the housing market altogether (perhaps because they have moved into a care home) will not be penalised. They can still use this new allowance within their estate against the value of their former family home.
4. RNRB ONLY APPLIES IF YOU LEAVE YOUR HOME (OR ITS VALUE) TO DIRECT DESCENDANTS
To benefit from RNRB your property must be inherited by your spouse, child, grandchild or other direct descendant (or a direct descendant's spouse or civil partner). Your estate will not benefit from the allowance if you leave your property to siblings, nieces and nephews or other in-direct relatives.
5. RNRB WILL BE PHASED IN OVER THE NEXT FOUR TAX YEARS
From the tax year 2017/18, RNRB will increase from £100,000 per person by £25,000 per tax year to £175,000 in 2020/21.
|TAX YEAR||RNRB ALLOWANCE/ PERSON||TOTAL ALLOWANCE/ PERSON|
6. YOU STILL PAY 40% ON ANYTHING BETWEEN £1 MILLION & £2 MILLION
On properties worth between £1m and £2m, inheritance tax will be paid as normal (40%) on the amount above the £1m tax-free threshold.
7. NO ADDITIONAL ALLOWANCE ON PROPERTIES ABOVE £2,350,000
On properties worth £2 million or more, homeowners will lose £1 of the 'main residence' allowance for every £2 of value above £2m. So for a couple, properties worth £2,350,000 or more will get no additional allowance.
Money Saving Expert: Inheritance Tax Plan to legally save £100,OOOs on your estate )
Mondaq: Inheritance Tax and The Family Income — 5 things you should know
Money Observer: New inheritance tax allowance: five things your didn't know
Informed Choice: 5 things you didn't know about the new inheritance tax allowance
The Money Advice Service: A guide to inheritance tax