Inheriting the family home is becoming less expensive due to a new inheritance tax (IHT) relief for residences which was introduced in April 2017.

The relief is flexible enough to allow a person to downsize to a smaller residence if they wish and still retain the relief from the previous, larger home.

Where someone dies on or after 6 April 2017 and the value of their estate is more than the IHT threshold of £325,000 per person (£650,000 per couple), the estate may be entitled to an additional Residence Nil Rate Band (RNRB) when a residence is passed to a direct descendant.

Direct descendants can include spouses and civil partners of direct descendants, as well as widows, widowers and surviving civil partners of direct descendants who predeceased and had not remarried at the time of the death.

The amount of relief

The maximum amount of RNRB for the tax year 2017/18 is £100,000 per person (£200,000 for a couple) or the value of the home if this is less.

This rises to £175,000 per person (£350,000 per couple) by April 2020. When added to the existing IHT threshold of £325,000 per person (£650,000 per couple), assets may be passed (including the family home) to direct descendants up to the value of £500,000 (£1m for a couple) free of tax.

The RNRB is used before the existing IHT threshold, so even owners of modestly-priced properties should benefit. The value that is used for the home is its open market value, less any debts such as a mortgage. If the person who died only owned a share of the home, it is the value of their share that is used.

As with the existing nil-rate band, any unused RNRB can be transferred to a surviving spouse or civil partner.

The estate may also qualify if a person downsized, or sold or gave away, their home after 7 July 2015.

Calculating the Residence Nil Rate Band

The government has provided a calculator to work out how much RNRB the estate may be entitled to.

The amount will be the lower of the:

  • value of the home, or share the direct descendants inherit
  • maximum additional threshold available when the person died

If an estate is valued at more than £2m, the amount to which the estate is entitled is reduced or tapered away by £1 for every £2 over £2m.

Using the Residence NIL Rate Band

The RNRB is applied against the whole value of the estate, not just the value of the home. Any unused RNRB from a spouse or civil partner can be added to this.

If the person who died was married or in a civil partnership and their partner died before them (even if this was before 6 April 2017), there may be some unused IHT threshold and RNRB to use.

In the same way, if an estate hasn’t used all the RNRB, it can transfer anything left over to any surviving spouse or civil partner of the person who’s died.

If the first of the couple died before 6 April 2017, all of the RNRB (or value of the house if less) can be transferred.

Homes that qualify

Only one home can qualify for the RNRB. If the person who died owned and lived in more than one home, the executor or administrator can choose which one to use.

If the person who died didn’t own a home because they’d sold or given it away after 7 July 2015, the RNRB may still be claimable under the downsizing rules.

If the home, or the share of the home, was held in a trust before the person died or is transferred to a trust when they die, a claim may be made depending on the type of trust.

Capital Gains Tax relief

The RNRB could also indirectly save Capital Gains Tax (CGT). On death, assets are passed on to children etc. at their current market value free of CGT. Where the value of a residence combined with other assets falls below £1m (from April 2020), these will all be passed on free of tax.

It can sometimes be the case that parents want to pass on cash to their children before death to give them a helping hand. This may involve having to realise investments to obtain the cash to pass on. As long as the parent survives for seven years after the gift, they can avoid 40% IHT. However, they may still incur a CGT bill on any gain on sale of the investments. The rate of CGT is currently lower than the rate of IHT, but the CGT bill could be avoided completely if the assets were not sold.

Deciding not to sell assets could therefore result in more money being available in the estate later on. However, such a move would need careful consideration as the estate could rise in value to over £1m value on death, leaving IHT to pay of 40%.

The above rules are complex, but if you wish to discuss these changes with regards to future tax planning, please do not hesitate to contact a member of our Probate or Personal Tax team.

 
 
 
 
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