One of the key commitments in the Tory Manifesto back in 2015 was the ability to leave the family home to your children in your will without it incurring Inheritance Tax. The Government recognised that property price increases had pulled many more people into the Inheritance Tax net than before. The aim, therefore, was to introduce a new allowance to keep the number of estates paying Inheritance Tax in five years’ time the same as the number who paid the tax in the year 2014/15.
So, in 2017, the new Allowance comes into effect. So, what does this new allowance, the “residence nil rate band” (“RNRB”), look like?
Well, the first key point is that its introduction will be spread over a number of years, minimising the cost to the Treasury. What was headlined as a “Million Pound Inheritance Tax Threshold” will only come about for couples in tax year 2020/21, when the staggered increase of the RNRB will reach its peak and combine with the existing nil rate band of £325,000 to give a total individual allowance of £500,000 – worth of course £1,000,000 to a couple.
A claim for the new allowance can be made for deaths occurring after 6th April 2017, and the bands started at £100,000 last April. It will then continue as follows:
£125,000 in 2018 to 2019
£150,000 in 2019 to 2020
£175,000 in 2020 to 2021
The above bands will increase in line with the Consumer Price Index from 2021 onwards.
If a person leaves a family home to a direct descendant, they will benefit from the RNRB as well as the ordinary nil rate band. Which all sounds simple until you start asking further questions.
You then find out that they must leave the property to a child or remoter descendant, or alternatively to an adopted child, a stepchild or foster child or any of their offspring. Those who want to leave assets to parents, siblings, nieces or nephews will only have the standard nil rate band to set against their estate
There are then implications for those people who have downsized or sold their property and also for those with properties in excess of £2M, who will see the allowance tapered.
Finally, if a person dies without using their RNRB, it will only transfer to a surviving spouse or civil partner and not to an unmarried co-parent.
Quite why the Government didn’t simply raise the Inheritance Tax allowance to £500,000 per person is a further question, especially when you consider that the RNRB won’t be fully into effect until 20/21, by which time the existing nil rate band will have remained at the same level for 12 years (as the Government have confirmed there will be no changes to this until April 2021).
This situation is likely to encourage lifetime tax planning by those who cannot benefit from the RNRB. They are the ones who now face the prospect of being left with just the standard nil rate band which will dwindle in value as inflation takes its toll over the next six years as it has done for the previous six years. Parents will have that same standard nil rate band, but at least the pill is sweetened for them by the availability of the RNRB.
To read further information concerning the RNRB, please find enclosed a link to the Government website