Recently, we’ve discussed the increasing amount of inheritance tax collected by HMRC. For many families, their biggest exposure to inheritance tax, and their most important asset, is the family home. To help people reduce inheritance tax bills on the family home, the residence nil-rate band (RNRB) is being phased-in for deaths on or after 6 April 2017. We covered the basics in an earlier article.
RNRB is available if a person’s estate includes their home which is left to their children, grandchildren or other lineal descendant. The amount of the RNRB is limited to the value of the home that is left to the direct descendants. The maximum RNRB is only available to estates below the taper threshold, currently £2m. Because the rules are complicated, many people will not qualify unless they take specific steps to secure the availability of the relief.
As with all IHT planning, the best course of action will depend on the specific circumstances of the family. Nevertheless, themes are beginning to emerge from conversations we are having. Here are six examples of situations where action may be required.
- Widow(er) whose will created an immediate post-death interest trust. If a property is held in trust following the first death, it is included in the surviving spouse’s IHT estate; but unless the house is ‘directly inherited’ on the second death no RNRB is available. If the trust assets would otherwise remain settled on the death of the life tenant, the trustees might consider transferring a share of the property to a child under the life tenant’s will to qualify for the RNRB.
- Estate above £2m. The taper threshold is linked to the value of the estate. If the value of the estate is likely to exceed £2m, then it may be worth considering lifetime transfers to reduce the value of the estate down below this figure. Equity release and cash gifts might have a role to play.
- Business property. As the value of the estate for the taper threshold includes business property such as certain trading company shares, this could result in the loss of RNRB. A lifetime gift of shares, perhaps to a trust, might help secure RNRB, but at the expense of losing the CGT exemption on death.
- Joint tenants. Many couples will own the family home as joint tenants. This means that the home will pass (on the first death) to the surviving spouse, who will inherit the unused RNRB allowance. If the survivor’s ‘estate’ is above £2m, then both RNRBs could be lost. Switching the property to tenants in common could help preserve entitlement to RNRB.
- Holiday home. RNRB is available in respect of a property that has been at some point been the person’s residence. This seems to include a property which was previously occupied as the main residence but is rented out at the date of death.
- Gifts with reservation. A person may gift their home to their children, but continue to live in it. Such ‘gifts with reservation’ are treated as being inherited by the done and can qualify for RNRB.