The new Residential Nil-Rate Band
Who will win, who will lose and who should review their Wills?
From April 2017, the Inheritance Tax (IHT) rules changed. If you read the papers, you could be forgiven for thinking that all couples are now able to pass on £1m worth of assets tax-free after their deaths, thanks to the new Residential Nil-Rate Band (RNRB). Sadly, this is not a wholly accurate picture.
It will be necessary for some Wills to be rewritten to ensure that you take account of the new regulations.
There are three IHT videos on this page and you can access a 4th by clicking here.
A reminder of the current position
The position at the moment is that each person can leave up to £325,000 of assets to anyone without paying tax. This is known as the Nil-Rate Band (NRB). Married couples can have a combined NRB of £650,000. These rules remain and the RNRB will sit alongside them.
An outline of the new position
The new RNRB enables the estates of certain people to claim an additional Nil-Rate Band to set against residential property left to their children, step-children, grandchildren, or to the spouses of any of these (just referred to as “children” hereafter).
Married couples with property and children
The new measure is designed to help traditional families who want to pass on their homes to the next generation. The greatest benefits will be for married couples with children and a valuable property. If this property is left to the children, then up to £350,000 of its value can be passed on free of inheritance tax. This is in addition to the couple’s ordinary NRBs of £325,000 each – hence the headline figure of £1m.
Unmarried couples with children
The picture is far less rosy for unmarried couples with children. Such couples may find themselves in a quandary. Each member of the couple is able to benefit from the RNRB individually, and so can pass on a share of residential property to children. This, combined with the usual NRB, will give them each a total of £500,000 which can be left tax-free. This is therefore the best path to take to maximise the tax benefits.
However, this is rarely ideal. Unmarried couples (like married couples) often want to leave their property to each other – either outright or in a trust for life. Neither option will attract the new RNRB.
So unmarried couples will have to choose: a tax break on the first death or their partner’s security? An unenviable choice.
People without children
Individuals (married or unmarried) without children cannot benefit from the RNRB.
A married couple with valuable property and children now seem in a strong position. They tick the boxes above: married, property, children.
However, if the estate of the person leaving the property to the children is over £2m, then this new RNRB is tapered away, at a rate of £1 lost for each £2 left over £2m.
This can be addressed by careful tax planning, but testators who do not take advice may leave their beneficiaries with an unnecessarily large tax bill.
Parents who suffer a tragedy
When drafting wills, we always ask parents to consider who should inherit their estate if any of their children dies before them.
The answer is usually that the child’s own children should take that share. Will drafters generally express this as an instruction that the share should be divided between such of those children “who survive me and reach the age of [eg twenty five] years and if more than one then in equal shares”. This ensures that the share is split between the appropriate grandchildren who reach the specified age. Until the grandchildren reach this age, the funds are held in trust.
Until now, this has worked well. But since 2017 this may cause a problem – the gift will be seen as going to the trust (rather than to the grandchildren) and so a key condition for the RNRB will not be met.
Such situations can be addressed, either by redrafting your gifts in the Will now, or by your executors taking action within two years of your death. If you have any concerns about how this would work in practice, please come and see us for further advice.
In order to ensure that your estates will take as much benefit as possible from the new provisions, we strongly advise you to review your Wills following the April 2017 changes. Unmarried couples may have difficult decisions to make; rich couples will need urgent tax advice, and everyone leaving assets to children will want to be certain that they are not also making an unnecessary gift to the taxman.
If you have any concerns about how the new provisions will affect your estates, we suggest that you come in to see us.