Inheritance tax changes – What is my estate entitled to?

The inheritance tax free entitlements have recently changed and estates may be eligible to an additional tax free exemption on death. Our private client team outline below the developments in the law and what this could mean for your estate.

The current position

When someone dies in the UK, inheritance tax (‘IHT’) is payable at a rate of 40% on the value of assets in the estate, after the deduction of any exemptions.

All individuals are currently entitled to a general Nil Rate Band (‘NRB’) of £325,000 each on any assets held in the UK. This entitlement can be transferred to a surviving spouse, meaning that a joint estate could qualify from an inheritance tax exemption of £650,000 on the second spouse’s death.

Changes to the rules

A further inheritance tax entitlement, in the form of the Residence Nil Band (‘RNRB’) was introduced on 6th April 2017 and may increase an individual’s inheritance tax exemption by £100,000 (increasing to £175,000 by 2021). As a result a couple could be entitled to a combined exemption from inheritance tax of £1 million if they are passing on a property to children or grandchildren. The aim of the measure is to help families pass on their family home, up to the value of £1 million, to direct descendants without an inheritance tax charge.

How do I qualify for the new exemption?

To qualify for the RNRB the following criteria must be satisfied on your death:

  1. Passed away after 6th April 2017;
  2. Owned part or whole of a property that has been the main residence at some point during your period of ownership;
  3. The property passes to your direct lineal descendants on death.

HMRC has a useful calculator that allows you to work out whether or not the RNRB applies in your circumstances.

If you own more than one property, the exemption can only be applied against the value of one property. It also does not matter where the property is located; it could be in the UK or not. The important point is that the property was your main residence at some point during your period of ownership.

What if my spouse predeceased me?

The general rule is that the estate of someone that dies after 6th April 2017 can also apply to transfer the unused RNRB of a spouse that predeceased. The date of the first death is irrelevant and can be prior to 6th April 2017. This means that a couple could have a total inheritance tax exemption of £1 million on the death of the second spouse.

Are there any limitations on the exemption?

If your net estate on death is over £2 million (before the application of any exemptions) then the amount of RNRB that you are entitled to tapers away by £1 for each £2 over the £2 million threshold.

Further, if some or all of your death estate is to be held on trust then the exemption may not apply; you should get advice on this during your lifetime to ensure that you qualify for the RNRB if tax efficiency is your priority.

Where do I go from here?

The RNRB rules are complex and their application remains uncertain, particularly when there is a question over domicile and tax residency. Those considering any form of lifetime estate planning should carefully consider their situation and the relevant issues.

If you require any advice on your estate’s entitlement to the Residence Nil Rate band, or any other Wills, or estate planning advice, then get in touch with our Private Client Solicitors who will be happy to assist.

Chris O’Callaghan

Natasha Southam

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