According to the Government’s official statistics published on 14 June 2016, the average price of a property in April 2016 in the UK was £209,054; with detached properties having an average value of £310,364.
The current inheritance tax nil rate band threshold is £325,000 (after which tax becomes payable at 40% on the value of any assets above the threshold unless they are passing to a tax exempt beneficiary, such as a charity). This threshold has been frozen until the end of the 2020/2021 tax year. So, as it stood, a single person with children, who owns a detached property with an average value, would only have £14,636 in available nil rate band to apply to the other assets in their estate once the value of the property has been taken into account. The person in this scenario was therefore likely to have an inheritance tax liability.
In such scenarios the family home may have to be sold in order to pay the inheritance tax. Many people considered this to be unfair, and believed that it didn’t recognise the sacrifices people make to pass wealth on to their children.
To try to address the issue the Government introduced new legislation (The Finance (No 2) Act 2015). This legislation inserts new provisions into the Inheritance Tax Act 1984 governing the treatment of a person’s residence (or share in a residence) for inheritance tax purposes when the residence is inherited by a surviving spouse or civil partner or lineal descendant (such as a child or grandchild). In addition to a nil rate band of £325,000, when leaving a property to a qualifying person, an additional ‘residence nil rate band’ (RNRB) is available. The changes are discussed in previous blogs here, here and here.
For many, the legislation, although intended to be simple and straightforward, has proved to be unduly complicated. As it is not long until the changes will come into effect (available on deaths on or after 6 April 2017), it is worth considering if changes to your existing will (or indeed making a will) or some careful estate planning will help you take full advantage of the change in the law relating to inheritance tax.
You may want to consider the following points and discuss with your financial advisor and/or solicitor how you can best plan for your family’s future:
There is no requirement that the property concerned has to be your main residence or a UK property. A holiday home will qualify. It is important to note that any debts on the property (such as a mortgage) will reduce its value for the RNRB. So if you own more than one property and you have a mortgage on each, it may be advantageous to consider if consolidating the mortgages against one property will enable your estate to maximise the use of your RNRB on your death.
The RNRB is limited to one property and capped at the value of your interest. If there are two or more properties in your estate at the time of your death, your personal representatives must nominate which property is the qualifying property for the purposes of the RNRB. If the nominated property is less than the RNRB (£100,000 in 2017/18 rising by £25,000 each year until it reaches £175,000 in 2020/21), this will mean the balance of the RNRB will be wasted. The balance cannot be used against a second property.
Downsizing your property
Further legislation contained in the Finance Bill 2016 will mean that if you have sold your qualifying residential property for the purposes of the RNRB on or after 8 July 2015 completely or by moving to a less valuable property, the value of the sold property (your former residential interest) will apply. It is important that if you are downsizing or selling your property completely that you keep all your paperwork in relation to the sale.
Gifts of property during your lifetime
The RNRB does not apply to lifetime transfers. So if you have given your property to your children in the last seven years (during which period the value of the property is still counted as forming part of your estate for inheritance tax purposes), on your death (after 6 April 2017) your estate would lose the benefit of the RNRB.
If you have a large estate, you may lose the benefit of the RNRB. If you, or you and your spouse or civil partner know that your estate or combined estates have a value over the taper threshold (£2 million until 2020/21), in order to take advantage of the RNRB you may wish to consider making lifetime gifts or passing assets on your death to people other than your spouse or civil partner.
The RNRB will only be available to your estate with certain types of trust. These include immediate post-death interest trusts or disabled person’s trusts and bereaved minor or bereaved young person trusts (when created by a parent). The property settled in the trust must be held for a lineal descendant. A discretionary settlement is not included even if all the potential beneficiaries of the trust are lineal descendants.
With careful planning and by ensuring you have a professionally drafted will (which is kept updated when any changes occur to your personal circumstances), you will make sure that your family are properly provided for on your death and any liability to inheritance tax has been minimised.