Estate planning: Is your estate free from inheritance tax?
The Government’s long awaited increase in the inheritance tax threshold came into being last year and many people are now expecting their estates to be free from inheritance tax unless their estate exceeds £1 million, but is this correct? Legal director for Gateley plc’s private wealth team, Emma McCarthy, explores the details.
Who does it apply to?
The new Residence Nil Rate Band (RNRB) applies to estates where the individual dies after April 6, 2017, owns a home or shares in a home and this home is inherited by the deceased’s direct descendants, including children and grandchildren. The RNRB will not benefit those without direct descendants. Therefore married couples with a £1m estate but without children, who wish to leave their estate to their nieces and nephews will have an inheritance tax bill on the second death of £140,000. Whereas couples with a £1m estate who have children and wish to leave their estate to their children on the second death, will not have an inheritance tax bill. Furthermore, couples with a £1m estate who have children and wish to leave their estate to their children on the second death, but do not own a property and instead have invested in a share portfolio, will have an inheritance tax bill on the second death of £140,000.
Fair or unfair, people need to be aware of what their threshold will be, especially as the RNRB is being introduced over several tax years as follows:
|
2017 – 2018 |
£100,000 |
|
2018 – 2019 |
£125,000 |
|
2019 – 2020 |
£150,000 |
|
2020 - 2021 |
£175,000 |
These amounts are transferable to the survivor (if married or within a civil partnership) on the first death and therefore the figures can be treated as double those shown. The magic £1m exemption will not be reached until April 2020 and it should be noted that these exemptions are not automatic– they must be claimed by the executors of the deceased and there is certain paperwork that should be retained in order to assist in this claim.
Further quirks to the new regime
- An estate may still benefit from the RNRB even if you downsize or have sold your home after July 7, 2015. Again, paperwork will be required in order to claim the RNRB in these circumstances.
- The amount of the RNRB referred to above is the maximum amount that can be claimed each tax year. If the value of your property or share in your property is less than the RNRB, you will be able to claim the lesser figure.
- If you own more than one home, the executors can nominate the home that should qualify for RNRB. However, buy-to-let properties will not be eligible, unless you live in the property at some point. The home does not have to be in the UK but it must be included in your estate and be subject to the inheritance tax regime applicable to England and Wales. This will depend on your domicile.
- If your estate is over £2m, then the RNRB will be tapered. For example if your estate is £2.1m then the RNRB will be reduced to £50,000 in the tax year 2017/18.
- A further complication can be seen if you leave your home to direct descendants but subject to a trust, for example until the grandchildren reach a specific age, the property may not benefit from the RNRB as the home has to pass to the direct descendants on the death of the deceased, not at a later date. Existing Discretionary Trusts over property or Nil Rate Band Discretionary Trusts which were to be secured over the deceased’s share of a property, may not benefit from the RNRB. This may be the case even if the discretionary beneficiaries are all direct descendants of the deceased. The crucial point is that the Discretionary Trust trustees can exercise their discretion as to who will benefit from the home and therefore the home is not being inherited by direct descendants. This issue may be rectified by updating your Will or letter of wishes with the trust or post death by a Deed of Appointment. It would be advisable to review your current arrangements to ensure that your estate will benefit if possible.
The RNRB regime is definitely a step in the right direction but only for some rather than all. We will have to wait and see what will happen to the RNRB in April 2021.
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