Inheritance Tax, or IHT, is frequently in the headlines, although, a staggering seven out of ten people in the UK know nothing about the new tax rules. Yes, that's right, another piece of complicated legislation has just been introduced. The sort of thing that makes one want to flee the country.
However, the new legislation actually means your family could save up to £140,000 in inheritance tax by 2021. This is clearly good news! Especially for working and middle class families whose main residence makes up the bulk of their net worth.
So, it pays to think about inheritance tax, and work out whether your estate can claim the new allowance. If you are eligible, this could be the easiest £140,000 your family will ever make. Register for our Briefing Webinars HERE; in order to learn more and establish if your estate is eligible so you don't lose out.
Inheritance Tax Explained
Every individual in the UK is entitled to leave an estate worth up to £325,000 upon which there is no IHT. This is known as Nil Rate Band (NRB). So, assets under the NRB limit of £325,000 are “tax free” on death. Anything you own above that amount is taxed at a rate of 40% - which your beneficiaries, typically your children, will have to pay.
The inheritance tax rules changed on 6th April with the introduction of an additional family home allowance, called Residential Nil Rate Band (RNRB).
The new threshold is set at £100,000 for each person and can be claimed on top of the existing NRB.
RNRB will increase annually from 2018 onwards by £25,000 at the start of every tax year, until it reaches £175,000 per person in 2021.
Claiming Residence Nil Rate Band
The new allowance can be claimed in the same way as the existing NRB. On death, your executors will complete the inheritance tax forms as part of the probate process, and if you qualify, they can claim the RNRB in addition to the NRB.
Should you and your spouse pass away at the same time the value of your combined estate has to be valued at more than £850,000 this coming tax year before the estate would face inheritance tax. By 2021 the total NRB and RNRB will be £1 million for married couples.
Your house, or a share of it, will need to be passed down to direct descendants such as children or grandchildren in order to be eligible for the RNRB. This might mean giving up an element of control in how you wish your estate to be distributed after you’re gone. For example, if you have trusts in your existing will, the RNRB might not be claimable because a trust is clearly not a ‘direct descendent’. For some people then, there will be a trade off decision to make between controlling how and when assets are distributed, and your beneficiaries paying less tax.
Estates Worth More Than £2 Million
It is no longer possible to confidently predict the tax position of larger estates without knowledge of the actions of your existing wills and associated estate and planning
Generally speaking, for an estate valued at more than £2 million, the RNRB will be gradually withdrawn, or tapered away, even if the home is left to direct descendants. The RNRB will be reduced by £1 for every £2 that the value of the estate is more than the £2 million taper threshold. This means that by the time a couple's estate is worth more than £2.7m, then RNRB might not be claimable.
However, there are likely to be various planning opportunities for high net worth clients with assets between £2 and £5million to reduce the value of their estate in order to claim the RNRB and still save their estate £140,000 in tax..
Planning Opportunities For High Net Worth Clients
We advise that high net worth families look at the whole picture when it comes to planning your estate. The RNRB might be a distraction to already sound planning; or vice versa, your existing planning could result in the RNRB being lost.
Items to consider: How am I leaving my estate in my will? What life cover do I have? What corporate benefits exist? Do I have any qualifying assets for business property relief?
Consider putting death in service benefits in trust such that they don't go into the estate of the surviving spouse (who can then borrow out of the trust without that asset inflating their estate, thus reducing the estate on second death).
Consider doing the same with pensions, however, be warned that this could result in a loss in itself in inheritance tax savings. Advice should be sought.
Lifetime Cash Flow & A Financial Life Plan
If you are looking to reduce your estate’s value below £2million and claim the RNRB you should consider your own bigger picture first. You don't want to give assets away that could harm your own lifetime cash flow and balance sheet - which should be driven by a financial life plan designed around the cost of your personal goals now and throughout retirement. You have to breath your own oxygen first. The children shouldn’t mind you spending more money on yourself - potentially the best way to reduce the size of your estate!
Properties Already Sold
People who have downsized to a less valuable home below the maximum threshold, or sold out of the market all together, then there are still provisions in place that will allow your estate to claim. However, this does not apply to homes sold before 8 July 2015.
Review Your Estate Today
Since 2009, NRB has been frozen at £325,000 whilst property prices in the UK have been rising.
With much of the UK population’s wealth invested in property, a large number of families are being hit with huge inheritance tax bills.
In the 2015-2016 tax year, HM Revenue & Customs collected a total of £4.7 billion in inheritance tax receipts (2).
Would you rather your children write a cheque to HMRC for £140,000 after your death? Or would you rather write your children or grandchildren a cheque for £140,000 instead?
RNRB Webinars & Strategy Sessions
If you’re interested in finding out more, you can sign up to one of our Inheritance Tax Briefing Webinars.
You can also register for a Strategy Session at our office, which costs £197, but gives you the chance to get bespoke advice and see if your will is currently set up to save your children an extra £140,000, or not. The £197 can also come off any implementation work you may need to do, and wish to do through us.
Click HERE to register for the Briefing Webinars in June 2017.
1 Old Mutual Wealth
2 HM Revenue & Customs