Finding The Time to Recap on Inheritance Tax Allowances

Who knows how we’ll ever make up this huge deficit- forecast amount to ￡300bn for this current financial year- which has come about as a result of covid-19. It is likely taxes will be hiked. Inheritance Tax could rise or reliefs/ allowances may be less ‘generous’. For now, I have had so many clients recently just wanting to recap on the basic Inheritance Tax allowances because they’re wanting to get their affairs in order, so I thought it’d be timely to share a few nuggets of wisdom.

The Nil Rate Band (of ￡325,000 per person) is the threshold above which Inheritance Tax is payable. Almost all of our clients are a good deal along the way towards passing this threshold based upon the value of their home only. Given a 40% levy could be due on any assets you leave exceeding the Nil Rate Band amount, it is worth noting that since the introduction of the Residence Nil Rate Band (RNRB) in April 2017, you may be able to avoid including the value of your property in Inheritance Tax calculations if you’re leaving it to “direct descendants”.

The RNRB was brought in as a result of David Cameron’s drive for couples to collectively have ￡1million they could leave to children through being able to retain the family home, or its cash equivalent, without the burden of Inheritance Tax to pay (at what is already obviously a very distressing time for them).

Single people may qualify for an additional ￡175,000 that can pass Inheritance Tax free under these rules, and this allowance is doubled for a couple. The RNRB available to you will be capped at the value of your home if your home is worth less than the maximum amount available.

You may be eligible for this relief even if you don’t have ‘blood-related’ children. This is because a ‘direct descendant’ is widely defined and includes a wide range of relatives, such a child, stepchild, past or present foster child, grandchild, a husband, wife or civil partner of a lineal descendant (including their widow, widower or surviving civil partner).

If your home was sold or gifted on or after 8 July 2015, you could still claim some or all of the RNRB. This is as long as it can be proven that you occupied the home as a residence for some period, even if only briefly- which is useful to know if you have owned more than one property and want to maximise the relief, given you can choose which one to apply the RNRB against (provided the conditions above are met).

Where your estate is worth over ￡2 million, the RNRB will unfortunately not be fully available as it is reduced by ￡1 for every ￡2 that the estate is valued over ￡2 million. This means, at today’s rates, that you will lose all the RNRB if your estate is worth ￡2.7 million or more as a maximum (i.e. this is for a couple who are married or in a civil partnership).

The application of the RNRB is slightly more complex if you have a “mixed bag” of assets, for example if some of them qualify for reliefs for Inheritance Tax purposes which can be claimed on agricultural or business assets via Agricultural Property Relief (APR) and Business Property Relief (BPR). This is because the value of your estate includes all assets (ignoring any reliefs when calculating available RNRB), so while any business or farming assets will hopefully pass free of Inheritance Tax due to APR or BPR, the value of those assets in still being counted as part of the estate may result in some or all of the RNRB being tapered away. If this is the case, RNRB will not be available to offset against your other non-business/ non-farming assets which are not eligible for reliefs.

In addition, where a Will contains age contingencies and certain trusts, as a result, the RNRB can be lost and we spend a lot of time advising around the intricacies of its application post-death to include dealing with transferring assets out of Trust to ensure RNRB is not lost.

If you’re considering how best to manage your estate, it makes clear sense to speak to a trusted advisor about the about how the rules apply to your individual situation.

For more information on any of the above, or how I can help you please send me a direct message.