For anyone who has ever had to deal with the complexities of Inheritance Tax, the term “Nil Rate Band” will be familiar. The Nil Rate Band for Inheritance Tax (IHT for short) represents that portion of the value of a deceased’s person’s estate that is not subject to tax. At present, the Nil Rate Band (or “NRB”) is £325,000 and has been pegged at that level for the last few years until 2021. Historically the NRB has been increased every few years. The remainder of an estate, subject to various exemptions and reliefs, is taxed at the rate of 40%.
As from April 2017, a new Residence Nil Rate Band comes into effect (the “RNRB”). The effect of this will be that married couples will potentially be able to leave assets to their family up to a value of £1m free of IHT. The new allowance is being phased in from next April in stages. For a married couple the allowance will be £200,000 in the tax year 2017/2018, £250,000 in the tax year 2018/2019, £300,000 in the tax year 2019/2020, £350,000 in the tax year 2020/2021. For single people, the above allowances are halved. As can be seen, the full £1m potential (for married couples) will eventually be available in April 2020.
So far so good. The devil however is in the detail. For the RNRB to apply, it is necessary for a person on their death to own a “qualifying residential interest” which needs to be “closely inherited”. So, what do these two qualifications involve?
Qualifying Residential Interest (QRI):
A QRI is defined as an interest in a dwellinghouse that was the deceased’s residence at some time during their ownership of the residential interest. Additionally, that interest must still be part of the estate immediately before death. Only one residence can qualify as a QRI. So another kind of residence, such as a rental property in which the deceased person either never lived or did not live immediately before their death, does not qualify.
Closely Inherited:
The QRI must pass to a lineal descendant, such as a child, grandchild or great grandchild. This includes, perhaps surprisingly, step-children and foster children. Adopted children are also included.
For larger estates, valued at £2m and above, the RNRB is withdrawn by £1 for every £2 over the £2m threshold. In this way, the RNRB will not apply for estates valued at £2.35m or above (from 2020).
As with the basic NRB, the RNRB can be transferred to the estate of a surviving husband or wife to the extent that it was not used when the first spouse died. It would not be used at all if the survivor inherited the whole of his or her spouse’s estate because inheritance from one spouse to another is automatically exempt from IHT (the “spouse exemption”).
The introduction of the RNRB gives scope for some tax planning opportunities and although, even if you have an existing Will, it is not automatically necessary to review the Will, it may be a good idea to do so to work out whether any steps can be taken in order to secure the maximum available RNRB. This may be particularly relevant where a person has been widowed or has children from a previous marriage.
The complexities of this particular area of the law make it sensible to review your current Will and any Letter of Wishes, the value of your assets and the ownership of those assets, to ensure that the maximum available RNRB can be utilised.
If you would like to discuss these issues in more detail, please make an appointment to see one of our Wills and Probate team who will be pleased to help.
At our Crewe Office: Alison Greatbanks on either 01270 21200 or agreatbanks@hswsolicitors.co.uk and Sophie Whittingham on either 01270 21200 or swhittingham@hswsolicitors.co.uk
At our Nantwich Office: Angela Lewis on either 01270 610300 or alewis@hswsolicitors.co.uk and Hugh Lewis-Morgan on 01270 610300 or hlewis-morgan@hswsolicitors.co.uk
