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How to benefit from the residence nil-rate band
Thursday 23 Mar 2017 Author: Emily Perryman

New legislation coming into force this April could save your family an additional £140,000 in inheritance tax (IHT). Not everyone will benefit, so getting your estate in order is imperative.

What’s changing?

Each individual currently has an IHT nil-rate band of £325,000. For every £1 of your estate above this level, 40% goes to the taxman when you die.

On 6 April, the residence nil-rate band (RNRB) will be introduced. This can be offset against your home provided you’re passing it down to your direct descendants.

The RNRB will start at £100,000 and steadily increase to £175,000 in 2020/21, at which point your family could escape IHT on up to £1 million of your wealth. This is because both nil-rate bands pass to the surviving spouse, effectively giving them a £650,000 IHT nil-rate band and £350,000 RNRB.

Who will benefit?

Jess Franks, IHT specialist at Octopus Investments, says the RNRB will help everyone who has been a homeowner and whose joint estate is worth more than £650,000.

The band is reduced by £1 for every £2 that a home exceeds £2 million, so there’ll be no RNRB for homes worth more than £2.2m (£2.35m in 2021).

Law firm Skerritts suggests switching property ownership from joint tenancy to tenants-in-common. This would enable someone to pass a share of their home to children on the spouse’s death in order to reduce assets.

You don’t have to own your home at death to get the RNRB. If you’ve downsized or moved into a care home on or after 8 July 2015, you simply need to demonstrate that your home would have qualified if you’d kept it and the proceeds are passing to your descendants.

The RNRB doesn’t cater for lifetime gifts – it only applies on death.

Beware trusts

If your home has been placed into a discretionary trust the RNRB will be lost. These trusts are flexible so there is not enough legal certainty that the home will be passed to descendants.

It’s possible to reverse a trust via a deed of variation. But Tom Lloyd Read, head of advice at Thomas Miller Investment, says it’s better to arrange your affairs correctly before this situation arises, especially as deed of variations could be legislated against in the future.

Lauren Parker, principal associate at law firm Mills & Reeve, suggests reviewing your will to ensure the RNRB can be claimed. You should also ensure both spouses have an interest in the property. ‘Also consider death bed tax planning so as to reduce the unwell spouse’s estate below £2 million,’ says Parker.

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