Inheritance Tax is about as popular as a politician. Having worked all your life, and been clever and frugal, you rightfully think you can now pass your money to your children and make their life a little easier than yours was. Along comes that wonderful idea called Inheritance tax. A tax of 40% on your assets above £325,000.
There are some simple ways to protect against this tax and using the residence nil rate band (RNRD) is one of them. Before explaining that, you have a nil rate band of £325,000 per person and that is transferable if not used. So, if a spouse passes away and you don’t use their allowance, on second death those two allowances can be added together to be offset against your estate. So, on second death, if the estate is less than £650,000, there is no tax to pay.
For many, that will suffice, but given the rise in house prices, our homes are creating a problem we weren’t bargaining for. In 2017, the RNRD was introduced. It simply acts as a top up to the above nil rate band, and is £175,000 each. Therefore, a couple can potentially pass on exactly £1m to their families. Both the nil rate band and residence nil rate band are now frozen until 2026 so that is the current total.
How does it work? Firstly, your estate on death has to have an interest in a dwelling-house that you lived in (or intended to live in). Buy-to-let properties do not count. If you have more than one house you live in, you can choose the one that the RNRB applies to, but it cannot be spread across two houses. The home has to be left to the direct lineal descendants like children, grandchildren, foster and step children, but not sideways like nephews and nieces.
If your estate is worth more than £2m, the RNRB will reduce by £1 for every £2 your estate is in excess of the £2m. Therefore, an estate of more than £2,350,000 will lose all the RNRB.
Remember that the RNRB is only used against the value of the home, not other assets. If the value of the share in the home was less than the RNRB of £175,000, the difference could be rolled over to the surviving spouse to be used by them.
If you sell the home, or downsize to another home, you can still use the RNRB if you still hold those assets from the sale as long as this is passed to the above lineal descendants. I would imagine the reason this has been put in place is so that those going into care can use the capital for the care costs and don’t hold on to the property to keep the RNRB.
Remember unmarried couples can neither transfer their RNRB between their estates or obtain any RNRB on gifts to each other’s children.
There may be benefits to using an RNRB on first death or leaving it until the second death by rolling that on to the surviving spouse. Think that through, but, remember you also have the ability in the two years after death, to create a deed of variation to alter the terms of the will. In simple terms, you look at what suits the survivor with today’s tax and the value of the estate, and, after agreeing with all beneficiaries of the estate, you vary that will to suit. It must be done within the two years of death.
This can only be done by varying a will. If there is no will, the laws of intestacy apply. I’ll not bore you with them as they are as palatable as a politician’s party, so make a will as soon as possible.
In the meantime, during your life, consider equalising estates between spouses to enable easy use of bands on death, and also consider what gifts you can make during your lifetime. I always think it’s better to see the benefit you have given, and if you live seven years, it’s out of the estate completely.
If you want advice on Inheritance Tax please call 01872 222422 or email info@wwfp.net or visit www.wwfp.net
Peter McGahan is the chief executive of independent financial adviser Worldwide Financial Planning . Worldwide Financial Planning is authorised and regulated by the Financial Conduct Authority. The FCA does not regulate credit cards, will writing and some forms of mortgage and inheritance tax planning.
Information given is for general guidance only, and specific advice should be taken before acting on any suggestions made. All information is based on our understanding of current tax practices, which are subject to change. The value of shares and investments can go down as well as up. Your home may be repossessed if you do not keep up repayments on your mortgage.
