The new tax year has brought a positive change for those concerned about the burden of inheritance tax likely to fall on their children and grandchildren with the advent of the ‘residence nil rate band’ designed to offset the value of the family home being passed down the family.
Whilst the headlines may talk in terms of the inheritance tax threshold effectively increasing to £1m for married couples and £500K for singletons (once the new allowance is fully phased in), the new rules are complicated and the devil is in the detail. The residence nil rate band won’t be available in every estate and many will miss out by failing to review their Will and estate planning to make sure that their heirs stand to benefit under the new rules.
The complexity of the new rules and the significant tax savings at stake means that a joined up approach to legal and financial planning is more important than ever.
A CALL TO ACTION?
- The new rules about the residence nil rate band are complicated and individuals will need expert advice to understand how this affects them and their heirs;
- More specifically, it is more important than ever for people to have an appropriate Will in place. Existing Wills will need to be reviewed to make sure these are structured in a way that will allow for any available residence nil rate band to be claimed rather than potentially wasted;
- Those with higher value estates upwards of £2m will need to review their Will and estate planning in the round given that the residence nil rate band tapers away to nil once the net value of the estate has breached this threshold figure. In the case of married couples or registered civil partners whether the threshold is breached is relevant on both first and second death (in the context of the opportunity to transfer unused residence nil rate to the estate of the surviving spouse or civil partner);
- Where the £2m threshold figure is a concern, appropriate Will planning can play an important part in helping to secure the benefit of the residence nil rate band (for example, to prevent undesirable bunching of the personal wealth of each spouse or partner in the hands of the survivor of them which could cause the threshold figure to be breached unnecessarily);
- Co-habiting couples with children will need to plan particularly carefully via appropriately drawn up Wills to provide for each other and for the children or other descendants as tax efficiently as possible;
- There are particular complexities around the residence nil rate band for those wishing to include trust arrangements in the Wills and around the choices to be made by the trustees after the Will takes effect, making expert legal advice essential. Even the simplest form of trust in a Will postponing the age of entitlement of a grandchild to an inheritance which includes the value of the family home or a share in it may be problematic;
- With careful planning and the benefit of expert advice it is still possible for individuals to include discretionary trust arrangements in their Wills without necessarily forfeiting the benefit of the residence nil rate band (such flexible trust arrangements being a common approach to provide for beneficiaries in a measured way rather than the value in the estate necessarily being subject to the beneficiaries’ circumstances and choices);
- It is important for any trust arrangements in a Will to be structured and, in due course, implemented by the chosen trustees with a view to harnessing any available residence nil rate band rather than wasting it. This will usually involve the trustees taking well informed and appropriately documented steps with the benefit of professional advice in a timely way soon after the Will takes effect;
- Where trust arrangements are included in a Will it is important to consider appointing at least one professional trustee or to make sure lay trustees are aware that they should take professional advice about the scope for harnessing the residence nil rate band at the relevant time (for example by flagging this in the letter of wishes to accompany the Will). This can help to make sure that any available residence nil rate band is captured rather than wasted.
- Those downsizing, or contemplating a lifetime gift of their residence or selling to move into care should seek specialist advice about how the residence nil rate band rules will apply in that case (with scope, where certain conditions are met, for the residence nil rate band to be claimed to offset the value in the estate previously represented by the former family home).
MORE ABOUT THE RESIDENCE NIL RATE BAND
- Pre 6th April 2017 and at present the ‘general nil rate band’ is set at £325,000 with married couples and registered civil partners having a combined nil rate band of £650,000 (lifetime gifts made within 7 years of death will eat into the nil rate band unless the gifts qualified for an exemption at the time they were made);
- From 6 April 2017 there is scope to claim an additional ‘residence nil rate band’ in relation to the family home passed down to children or children in law (or further down the family line to grandchildren and to certain other qualifying individuals such as foster and step children);
- Once fully phased in, the residence nil rate band will be £175K (the residence nil rate band is due to increase from £100,000 per individual to £175,000 per individual over the next four tax years) with married couples and registered civil partners having a combined residence nil rate band of £350K;
- If the residence nil rate band is not claimed in the estate of the first spouse or registered civil partner to die, it is transferable by way of an uplift to the residence nil rate band available on second death (even if the first death happened before the new rules come into force) and so that typically the residence nil rate band will be claimed when the family home is inherited as part of the estate passing to children or grandchildren on the death of a surviving spouse or registered civil partner;
- The offset of any available residence nil rate band is against the value of the deceased’s residence at the time of his or her death and it doesn’t matter if the beneficiaries intend to keep the property or if the property is going to be sold as part of the process of winding up the estate of the person who has died;
- If a person has more than one home, there is scope to elect which one should be allocated the benefit of the residence nil rate band;
- There are special rules where an individual has sold or given away their residence or downsized during their lifetime so that in certain circumstances the residence nil rate band will be available to offset value previously represented by that residence when inherited by qualifying descendants;
- There is no scope for the residence nil rate band to be claimed where the family home is left to someone who doesn’t fall within the definition of a qualifying descendant. Essentially, qualifying descendants are children of the deceased (including step children, adopted children and foster children), grandchildren and other lineal descendants as well as their spouses and civil partners (and the surviving spouses or civil partners of deceased lineal descendants if they have not remarried).
- Broadly speaking those with an estate in excess of £2m (including the value of business and farming assets)will not benefit from the residence nil rate band which quickly tapers away to nil where the estate value exceeds this threshold.
Further Information & Legal Advice
If you would like more information about inheritance tax, please do not hesitate to contact a member of the Private Client Team.
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