There has been much talk about the government’s rumoured scrapping of inheritance tax (IHT) ahead of the next general election, at a cost to the Treasury of up to £7bn a year.
However, until and unless this pledge turns into policy, the current inheritance tax threshold remain in force. Known as the nil rate band (NRB) and the residential nil rate band (RNRB) we look at how these tax thresholds affect the inheritance tax payable on estates.
Inheritance Tax
When a person dies Inheritance Tax is levied at 40% on the value of their estate over the inheritance tax threshold, known as the nil rate band (NRB), and on certain gifts made during their lifetime. The NRB currently stands at £325,000 and can be set against all asset types.
Nil Rate Band (NRB)
If a husband or wife leaves their estate to their surviving spouse, their estate qualifies for 100% exemption so no tax will be payable. If there is an amount of the NRB that is unused it can be transferred to the survivor of the marriage or civil partnership to increase the value of the nil rate band available on their death. The transferable NRB is available to survivors of a marriage regardless of when the first spouse died.
For Example:
Alan dies leaving an estate worth £600,000. He leaves £130,000 to his children and the rest to his wife Sandra. The NRB threshold at the time Alan died was £325,000. The £130,000 left to the children would use up 40% of the NRB, leaving 60% unused.
When Sandra dies, the NRB threshold is still £325,000. Her available threshold would increase by the unused 60% of of Alan’s NRB, so if Sandra’s estate is not worth more than £520,000 (Sandra’s £325,000 plus Alan’s £195,000) there’ll be no Inheritance Tax to pay when she dies.
If Sandra owns a property that was her home, she can increase this even further…
Residential Nil Rate Band (RNRB)
The residence IHT nil rate band (RNRB) originally came into effect for deaths on or after 6 April 2017 at a level of £100,000 and was increased every tax year by an additional £25,000 reaching £175,000 for the 2020/21 tax year where it has remained frozen. It could save an estate up to £70,000 in inheritance tax.
A surviving spouse may be entitled to an increase in the residence nil rate band if the spouse who died earlier has not used, or was not entitled to use, their full residence nil rate band. This transfer does not happen automatically and has to be claimed via a request to the HMRC within 2 years of the death of the surviving spouse or civil partner. The calculations involved are potentially complex, but the increase could result in a doubling of the residence nil rate band for the surviving spouse.
The RNRB is essentially a ‘top up’ to the NRB to £500,000 (£325,000 + £175,000) in respect of one residential property but as is often the case, there are restrictions which include:
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- The residential property must pass on death to ‘lineal descendants’ i.e. children, stepchildren, grandchildren, great-grandchildren, or a spouse of a lineal descendant.
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- The relief is only available for a property which has been the person’s residence whilst it was part of the person’s estate.
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- A person must have owned an interest in the property at the date of their death. If they previously owned a property, but sold it before their death, they must have owned that interest in a residence on or after 8 July 2015.
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- There is tapered withdrawal of the residence nil rate band for estates with a net value of more than £2 million (after deducting any liabilities but before reliefs and exemptions). The residence nil rate band is reduced by £1 for every £2 that the amount exceeds the £2 million threshold.
This means that married spouses and civil partners who own residential property, are now able to gift up to £1 million to their direct descendants with no inheritance tax payable on their estate. However, whilst the residence nil rate band is welcomed by many, with the high cost of property prices, some couples may still need to consider lifetime gifts or trusts to reduce estates below the £2m threshold.
How we can help
Inheritance tax planning can be complex and should be tailored to your specific situation, considering your personal circumstances and future plans. Other taxes need to be considered carefully and there can be scope for substantial savings which may be missed if professional legal advice is not sought.
Please contact our Wills, Trusts & Estate Administration team to see how we can assist with drafting a Will and estate planning to minimise tax liabilities on your estate. You can call us on 0118 975 6622 (Lower Earley office) or 01491 570900 (Henley-on-Thames office) or send us a confidential email to office@thpsolicitors.co.uk