RNRB came into effect in April 2017 and could enable you to leave up to £1 million to your children free of Inheritance Tax (“IHT”) subject to certain conditions being met. Ultimately the RNRB could allow married couples to save up to £140,000 of IHT but you may need
to take action to ensure your estate achieves the maximum benefit available.
Married couples with estates between £650,000 and £2,700,000 or individuals with
estates between £325,000 and £2,350,000 should be reviewing their Wills to make sure
that they qualify.
Those without Wills should put one in place otherwise the rules of intestacy, which apply on estates without Wills, will take effect and they may not be IHT efficient.
What is the RNRB?
The RNRB is an IHT allowance which is in addition to the current IHT-free allowance of £325,000, for individuals who died on or after 6th April 2017. It can only be used against the value of your home. The starting allowance is £100,000 per individual increasing by £25,000 each tax year until it reaches £175,000 in 2020. By adding £175,000 to the existing allowance of £325,000, each person has an IHT allowance of £500,000. This is transferable from one spouse to another so a
married couple have £1m between them. If the first spouse died before 6th April 2017,
then his or her RNRB will always be available to transfer to the surviving spouse when the second spouse dies.
However, the RNRB can only be claimed if your home is left to “lineal descendants”.
“Lineal descendants” means children,
grandchildren and they're bloodline and
their spouses. It also extends to adopted
children, foster children, step-children (but only where the new partner actually
married the parent), and a child for whom
the deceased was a guardian. However, it does not cover lifetime gifts or trusts even where all the beneficiaries would qualify as lineal descendants.
The RNRB will however taper away once your estate exceeds £2 million. For every £2 over £2 million, the RNRB will be reduced by £1.
Common Pitfalls in existing Wills:
If you have a Will leaving assets to a trust then you may not qualify for the RNRB. Please note that if you have left your estate in part to lineal descendants and in part to other beneficiaries then part of the RNRB will be lost.
We are able to offer solutions to situations where you wish to use trusts to protect assets or beneficiaries but you also want to benefit from the RNRB.
Many Wills are drafted to leave assets to children and then to grandchildren if a child has died. It is common for people to state that the grandchildren will only inherit at a certain age, i.e. 21 or 25. This creates a trust (often without people realising it) and therefore, should this situation arise, that share of the estate will not qualify for the RNRB.
There are ways around this problem and we can deal with it by including some specific drafting into the Will.
The RNRB starts to be tapered away for estates that are over £2 million. However, there is planning and structuring that we can consider with you which, if put in place, may still allow you to benefit from the RNRB.
Extra planning may be required for unmarried couples and those with a more complicated family arrangements, for example previous marriages which may mean additional tax bands are available and should be used up to reduce IHT further.
What if I want to downsize or if I need to sell my house?
As long as you have owned and lived in a property since 8th July 2015 (the day the
allowance was announced), the RNRB will still be available even if the property has
since been sold and you have not bought another property, or if you have downsized.
The RNRB will also be available if you own a property but you have moved into a care home, provided it was your residence at some time during your period of ownership
on or after 8th July 2015. It is vital that records are kept and we are able to advise
you on what records and papers to keep to make the claims for the additional tax relief
easy.
It is important that you seek specialist advice about the finer details in relation to
RNRB and inheritance tax planning.