IHT planning for couples- Changes you need to know about
From 6 April 2017, there is an important change to Inheritance Tax (IHT) that families need to be aware of so that they can plan their wealth effectively for the future. This change is often referred to as the ‘family home allowance’ but is more correctly referred to as the Residence Nil-rate Band (RNRB).
HOW IHT WORKS
Firstly, it helps to understand a little more about how IHT works, and how it is applied to estates on death. Everyone has a personal nil-rate band (NRB) currently set at £325,000, that is unless they have used some of it to make gifts or have inherited NRB from a spouse or civil partner who has died. Married couples and civil partners (but not unmarried couples) are able to pass
their assets to each other tax-free, and the surviving partner is allowed to use both tax-free allowances (unless of course some was used up on the first death), effectively doubling their combined NRB to £650,000. Where IHT is payable, on amounts above the deceased’s total nil-rate band entitlement, it is normally at a rate of 40%.
THE RESIDENCE NIL-RATE BAND (RNRB)
The RNRB is an additional allowance that can be used where the surviving spouse dies on or after 6 April 2017 and passes their interest in a residential property to one or more direct descendants, meaning children, stepchildren, adopted children, foster children and their lineal descendants. It also includes the spouses or civil partners of lineal descendants, providing they didn’t remarry before the death of the individual bequeathing the property. The maximum RNRB that a couple can have is the lower of the value of the house or two times the RNRB. The RNRB is £100,000 from April 2017, rising to £175,000 by 2020.
For a property to qualify, several criteria must be met. In the case of a couple, only the second spouse to die needs to have lived in the property. Buy-to-let properties aren’t eligible if the owner didn’t live there. A former main residence that is rented out would qualify. If there are several properties involved, then the executor of the estate can choose which property to nominate. In the case where the deceased downsized, if this happened on or after 8 July 2015, then RNRB on the difference in value between the old and the new property can be claimed.
Where an estate has a net value of £2m or more, the RNRB is tapered away with £1 lost for every £2 net estate value over £2m. Families that have assets of over £2m may benefit from making use of the NRB and RNRB on the first death in order to reduce the estate of the surviving spouse.
A COMPLEX SITUATION
The introduction of the RNRB gave rise to headlines saying that parents or grandparents could pass on a home worth up to £1m free of IHT; however, in practice, the application of the RNRB can be complex and requires expert estate planning advice.
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