Inheritance Tax (IHT) and the new Residence Nil-Rate band
Posted by siteadmin on Thursday 30th of November 2017.
Adam Smith, Technical Pensions expert from FAC discusses how changes to (IHT) Inheritance Tax and the new Residence Nil-Rate Band could affect you.
At the beginning of 2016, the number of UK families paying inheritance tax (IHT) was at a 35-year high, as rising house prices pushed the value of family assets above the tax threshold. From April 2017 an additional allowance came into force which has seen these numbers recently being driven down by the introduction of the new Residence Nil-Rate Band (RNRB) allowance.
So what do these changes, along with myriad of other tax complexities, mean to you and your family?
This allowance will eventually add £175,000 to everyone’s inheritance tax nil-rate band by April 2020 – the first tranche of £100,000 became a reality on 6 April this year, this table below illustrates how the move from £100,000 to £175,000 will happen.
* ‘Couple’ refers to individuals legally married or in a registered civil partnership.
The extra nil rate band is fully available to anyone who:
• passes the family home to ‘direct descendants’ – broadly their children/grandchildren and/ or their spouses on death; or
• had a family home, then downsized on or after 8 July 2015 (passing on assets of equivalent value to children/grandchildren); and
• has an estate below £2M.
Inheritance tax facts: what is IHT and who does it affect?
Inheritance tax, or IHT for short, is in simple terms a tax payable on the assets (money or possessions) you leave behind when you die, so it’s often referred to as ‘death duty’.
The assets making up your estate can include:
• Cash and savings in the bank
• Property and valuables, such as art, jewellery etc.
• Businesses you own
• Pay-outs from life insurance policies not held in trust
Many estates that are now subject to IHT in the UK belong to those who would not necessarily call themselves wealthy – in fact it is only if the value of your estate is below the threshold of £325,000 there is no IHT to pay.
Inheritance tax facts: who pays the IHT?
If you make certain kinds of gifts during your lifetime, but die within seven years after making them, the recipients of the gifts may be liable to pay IHT.
What are my options when it comes to managing IHT?
Of course, there are ways that you can legitimately reduce or even fully mitigate the impact of IHT.
Here are some of the options:
• Spend or give it away – this is the simplest and easiest option, as long as you live for another seven years after the date of the gift; just make sure you don’t give everything away!
• Give away your excess income regularly – unspent income that otherwise increases the estate can be distributed. You could also use it to pay for the cost of life cover.
• Life cover – this is another simple way of mitigating the impact of an IHT bill. The premium and amount of cover will normally be fixed, giving you control of your estate, rather than having to make substantial gifts. You can use the annual £3000 exemption or surplus income to fund the cost of cover.
• Using trusts – this is important if you don’t want to lose control of your capital. Some trusts will pay a fixed level of income, while others can offer additional benefits, such as protection for your beneficiaries from divorce or bankruptcy.
• Specialist investments – it’s possible to invest in a range of permitted UK companies and achieve IHT exemption after only two years by attracting Business Property Relief. This is a higher-risk approach when compared to the alternative options, but it offers quick relief and you don’t have to give any assets away –which means you have ongoing access to your capital.
An example of how the RNRB will work:
Steve was married to Valerie when he died in Jan 2017 bequeathing his entire estate to Valerie. This included the family home worth £500,000. In June 2020 Valerie dies and leaves her entire estate worth £1m to her two children.
Valerie’s estate can use the RNRB of £350,000 together with her nil rate band of £325,000 and Steve’s nil rate band of £325,000, totalling £650,000, which was transferred to Valarie on his death – meaning when you add the allowances of £650,000 to the RNRB of £350,000 you reach £1m and therefore no IHT will payable on her death.
If this situation had occurred prior to the RNRB being brought in then Valarie’s estate would have faced an IHT tax of 40% on the £350,000 above the £650,000 nil rate allowance or £140,000.