Passing on your estate to your chosen beneficiary requires you to plan well in advance. The sooner you plan the better you can benefit from the tax opportunities available. The key thing is to understand the balance of tax regimes, which will help you to make the right decisions and save money in the long term.
Inheritance Tax is payable on assets such as property, money and possessions that are passed on when you die. Tax is 40% on assets that exceed the threshold (the nil-rate band) which is currently at £325,000.
Residence nil-rate band
The introduction of the residence nil-rate band (RNRB) is the biggest reform to inheritance tax legislation in almost a decade. For deaths that occur after 6 April 2017 a new allowance, the residence nil-rate band (RNRB), will permit the further reduction of Inheritance Tax due on the sale of a family home. This new allowance will begin at £100,000 per individual, rising to £125,000 in 2018, £150,000 in 2019 and £175,000 in 2020.
This will allow individuals to pass on assets including a family home worth up to £425,000 to their children or grandchildren tax-free. Couples can combine this allowance, taking their total to £850,000 from April 2017. With house prices continuing to rise, more individuals have become liable for IHT.
Who can inherit?
The new allowance is available only when estates are directly inherited by children, adopted children, stepchildren or grandchildren. It will not apply if property is left to nieces or nephews, or brothers or sisters.
Whether the RNRB will be available if someone settles their home into trust by will when they die depends on the type of trust. If it is a discretionary trust, the RNRB will not be available, even if the potential beneficiaries are children or grandchildren
Unused additional threshold
Any unused additional threshold when someone dies can be transferred to the deceased’s spouse or civil partner’s estate. This can also be done if the first of the couple died before 6 April 2017, even though the additional threshold wasn’t available at that time. The additional threshold only applies to the estate of a person who’s died. It doesn’t apply to gifts or other transfers made during a person’s lifetime. This includes gifts that become taxable because they’ve been made within 7 years of a donor’s death.
With the RNRB introduced for deaths occurring on or after 6 April 2017, now is a good time to review any existing estate planning arrangements. Tax treatment depends on individual circumstances and may change in the future.