Inheritance Tax and Your Home

From April 2017 the rules for Inheritance Tax (IHT) will change.  Home owners may be eligible for an additional allowance known as the ‘residential nil rate band’ (or ‘RNRB’).  Although welcomed by many tax specialists and lawyers, the laws in this respect are quite complex and all home owners should seek advice.  Ben Holden, a solicitor who specialises in this field answers your questions

What is the current threshold for IHT?

£325,000.00 and it has been set to remain at this level until at least 2019.  If, for example, the sum total of all your assets is worth £425,000.00 the first £325,000 would be taxed at 0%.  This is known as the ‘nil rate band’ (NRB).  The balance of £100,000 falls into the 40% tax band, giving HMRC £40,000.

Is it any different if I own a home?

Yes.  From April 2017 the RNRB can be added to the NRB for homeowners.  The threshold for the RNRB is £100,000 in the tax year 2017-18; £125,000 in 2018-19, £150,000 in 2019-20 and £175,000 in 2020-2021.  From April 2020 your property and assets will have to be worth in excess of £500,000 before tax is payable – the NRB at £325,000 + RNRB at £175,000 = £500,000.

Is it really that straightforward?

No.  It sounds obvious but you must own or have an interest in a home for this to apply.  The RNRB is only applicable against the value of a property.  For example, if you die in May 2020 the RNRB will be £175,000.  If your property is worth £150,000 you will have lost £25,000 of tax free allowance.  You will not be able to apply that allowance to the rest of your estate.

The property must also pass to your descendants e.g. spouse, children, grandchildren and/or step children.  This does not include children of cohabiting partners (unmarried couples) or brothers and sisters.

Is there a limit on the RNRB?

Yes.  If your entire estate is worth more than £2m the RNRB applicable will reduce by £1 for every £2 you are over that threshold.  If you are worth £2.2m and die in May 2017 then your RNRB will be reduced to zero.

What if I downsize?

You will be covered if you decided to downsize e.g. move to a property of a lesser value or cease to own a property altogether.  You will be given a credit equal to the value of your previous property, but you will be limited to one RNRB.  For example if you sold a property worth £200,000 and bought a property worth £90,000 and died in May 2017 you would only be able to apply a further £10,000 from your previous property.  £10,000 +£90,000 = £100,000.

Can married couples combine their residential nil rate band?

Yes.  Very much like the general NRB the RNRB is transferable from spouse to spouse.

What if the first spouse dies before April 2017?

This does not matter.  So long as the second spouse dies after this point both RNRBs are available.

Does the RNRB apply if my property goes into a Will Trust?

The law in this area is far from straightforward.  The general answer is no.  However, if a spouse has an interest for life, or if the property is held until a child reaches 25 years or if it is held for a disabled child it is possible for the RNRB to apply.

Those who have a Nil Rate Band Discretionary Will Trust should review their Wills.  These types of Will Trusts were typically made with tax planning in mind.  Those who still have a Nil Rate Band Discretionary Trust will be interested to learn that they could risk losing the RNRB and should seek urgent legal advice.

What should I do next?

For the vast majority of home owners this should result in a review of their affairs.  Speak to a solicitor who specializes in this area.  If the RNRB is not claimed your loved ones could be losing out by paying unnecessary amounts of Inheritance Tax.

Ben Holden, director/solicitor is the Head of the Wills & Probate Department at Donnelly & Elliott and has over a decade of experience in dealing with such issues. By providing simple solutions to often complicated circumstances he offers practical advice that is also cost effective.

As part of their commitment to excellence in this field, Donnelly and Elliott Solicitors are proud to be accredited members of the Law Society’s Wills & Inheritance Quality Scheme.

Ben Holden is a member of the Society of Trust & Estate Practitioners (STEP) and a full accredited member of Solicitors for the Elderly.

Date: November 2016. Donnelly & Elliott Limited Solicitors|38 Stoke Road Gosport Hampshire PO12 1JG |02392 505 500| Note: The above information is for general guidance and in part forms the opinion of the author. It is based on the law as at the date of this note. It should not be relied upon in part or in whole as a substitute for independent legal advice.  If any of the issues raised in this article effect you please contact a member of our team.