The arrival of the £1 million Inheritance Tax Free Allowance. Well almost!
Last tax year heralded the introduction of the new Residence Nil Rate Band, the RNRB, which is an extra Inheritance Tax free allowance of £125,000 per person in addition to the existing IHT free allowance known as the Nil Rate Band, NRB, of £325,000 per individual.
The RNRB will increase by £25,000 a year over the next 2 tax years until the 2020/21 tax year when it will reach £175K per person. By that stage a married couple or a Civil Partnership will have a potential combined IHT free allowance of £1 million (£325K NRB and £175K RNRB per person x 2) per couple! This will have fulfilled a long standing Tory Party promise from several years ago.
Moreover the RNRB will be transferable where the second spouse or civil partner of a couple dies on or after 6 April 2017 irrespective of when the first of the couple died. The Nil Rate Band will continue to be £325,000 from 2018-19 until the end of 2020-21.
However, as ever with tax legislation things aren’t quite as simple as they at first appear!
Firstly in order to be eligible for the RNRB you need to leave your home to your children in your Will. Children include foster, adopted or step-children or linear descendants including grandchildren on death.
Secondly you are only eligible for the full RNRB allowance if your estate is worth less than £2 million. This limit will rise to £2.35 million by 2020-21. Basically this means that where your estate exceeds £2m a taper relief applies so for every £2 above £2m your RNRB reduces by £1 until it reaches £2.2 million when you lose your RNRB altogether!
The calculation of your estate for RNRB is not the same as the calculation of your estate for Inheritance Tax purposes! The normal IHT exemptions and reliefs do not apply! For example 100% business relief and 100% agricultural relief do not apply! This makes your estate difficult to calculate for RNRB purposes.
So if you are leaving your home in your Will to a Discretionary Trust think again. If you have children and you would like them to inherit your estate when you die now could well be the time to review your Will and your estate planning.
As ever it is important to get professional advice from an estate planner and/or an Independent Financial Adviser who is ideally a Chartered and/or Certified Financial Planner. Do contact us for further advice if you are affected by these changes. You know it makes sense!
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