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The inheritance tax residence nil rate band is now in force

The inheritance tax residence nil rate band (RNRB) comes into force today. We look at what you need to know and how you can increase your entitlement.

Inheritance tax saving

In this tax year if you comply with the necessary requirements the RNRB will save an individual up to £40,000 of inheritance tax and a married couple (or a couple in a civil partnership) up to £80,000.

To achieve this saving, on your death you must leave a residential property which you have occupied at some point to your “lineal descendants”. Lineal descendants are your children and grandchildren and their spouses and civil partners and include adopted, foster and step-children. The RNRB is transferable between married couples so if the allowance is not used on the first death (perhaps because the family home is left to the surviving spouse) the executors of the second spouse to die can claim a double allowance.

The RNRB will increase by £25,000 a year until 2020/21 when it will be fully in force and will amount to £175,000 for an individual or £350,000 for a couple, saving inheritance tax of £70,000 and £140,000 respectively.

What if I sell my house and move into care?

The RNRB will still be available if you have sold your house since 8 July 2015 or do so in the future, and you leave other assets instead to your lineal descendants in your Will. It is also available if you give your house away, as long as you leave sufficient other assets to your descendants in your Will. However, the RNRB is not deductible against a failed lifetime gift that has become  subject to inheritance tax.

Reductions for larger estates

If your estate is above £2 million then the allowance will taper away by £1 for every £2 in excess of £2 million. It’s important to note that the £2 million threshold is calculated taking into account all the assets in your estate not just those liable to inheritance tax. Individuals who own valuable business or agricultural property could find in many cases that they cannot claim the allowance. In those circumstances, a well drafted Will and appropriate estate planning can help to maximise the amount to which you would be entitled.

Unmarried couples

The RNRB can be claimed by each person in an unmarried couple. However, if the family home is left to the survivor of the couple it cannot be claimed on the first death and the unused allowance cannot be transferred to the surviving partner. This means that in those circumstances unmarried couples can claim only one allowance achieving a tax saving of half that of married couples. This can be overcome by making a Will leaving a sufficient share of the family home to trusts for the children on the first death so ensuring that an allowance can be claimed on each death.

Do I have to change my Will to benefit?

That depends on the terms of your Will. In most cases the likely answer is that you will not need to change your Will but if you are in any doubt you should contact us for a Will review.