We are regularly asked questions by our clients covering a wide range of issues, both topical and technical. So we have decided to feature them in a ‘Your Questions Answered’ slot in our monthly e-newsletter from now on.
We’re starting with an estate planning question and an explanation on what the ‘residence nil rate band’ is all about.
Over to Financial Planner, Helen Thomas to explain and explore how we can help you to understand, manage and mitigate your inheritance tax position…
Q. What is the residence nil rate band (or RNRB for short)?
A. This is an extra inheritance tax allowance that applies where a main residence is passed on death to a direct descendant.
Q. How much additional nil-rate band is available?
A. The amount available has been increasing each tax year. It is currently worth an additional £150,000 per person (tax year 2019/20). By 2020/21 the RNRB will be £175,000 and then will increase in line with Consumer Price Index (CPI) from 2021/22 onwards. This means that there will be a potential nil rate band of £500,000 per person / £1,000,000 per couple available from 2020/21, on which no inheritance tax is payable.
Q. What’s meant by ‘direct descendants’?
A. This includes children, grandchildren and step, adopted or foster children. It doesn’t include nieces and nephews or siblings. The property can be gifted to one or more of these direct descendants.
Q. What if my Will leaves everything to a Trust rather than direct to individuals?
A. If this is the case, your estate will not automatically qualify for the RNRB, even if the beneficiaries are limited to direct descendants. That being said, if Trustees appoint the property out to direct descendants within two years of death, the RNRB could potentially still be claimed.
Q. What if I have more than one property?
A. To get the RNRB, you need to have held a ‘qualifying residential interest’ at some time during your lifetime. This simply means that you will need to own or have part ownership of a property that was your residence at some point during the period of ownership. If you have two qualifying residential interests, then your personal representatives can nominate which property will utilise the RNRB. However, you can’t offset against other types of property e.g. investment properties or buy-to-lets.
Q. What if I downsize or sell my home?
A. The additional nil-rate band is also available when you downsize or cease to own a home on or after 8th July 2015 and assets of an equivalent value, up to the value of the additional nil-rate band, are passed on death to direct descendants.
Q. What if you don’t pass your property straight to your children on first death – can any unused allowance be transferred?
A. Yes – if a property passes from say husband to wife on first death, the survivor’s estate can ultimately claim any unused allowance so the £1m maximum can still apply.
Q. Does it apply to everyone?
A. No. The RNRB is reduced for estates with a net value of more than £2 million, at a rate of £1 for every £2 over £2 million. So for estates with a net value of £2.3 million, there will be no RNRB.
Q. What is ‘net’ value?
A. The net value of an estate is the total value of all of your assets (less any debt), regardless of whether they are themselves exempt from inheritance tax so business and agricultural assets are included. As a result a great many of our clients do not qualify for the relief.
Q. How can we help?
A. Estate planning is an integral part of the financial planning process and regardless of whether you qualify for the RNRB or not, helping you to manage and mitigate your inheritance tax position and protect your legacy for your loved ones is always on our agenda.
As part of our ongoing review service, we monitor the overall value of a client’s estate and we can help you see how your estate might evolve over time and how your inheritance tax position can change.
Using your personal asset and income model – your ‘AIMS’ model – opportunities for gifting, trust planning or philanthropy can be explored to reduce the overall tax take and in some cases allow the estate to qualify for the RNRB in the future.
Should you have any questions about any of the above or about your own estate planning in general, don’t hesitate to call us on 01704 571777. And if you have topics you’d like to know more about just let us know or fire your questions our way!