Here at Moorland Mayfair Wealth Management we take time to understand how any new rules implemented by the Government will operate in practice, and how it will affect our clients whilst helping them to avoid any potential pitfalls.
In the Summer Budget the Chancellor announced that a new relief for Inheritance Tax (IHT) would be introduced.
The new IHT Residence Nil Rate Band (RNRB) will be introduced in April 2017 providing an additional £100,000 per individual. It is in addition to an individual’s own nil rate band of £325,000, and conditional on the main residence being passed down to direct descendants (e.g. children, grandchildren).
By 2020/21 this figure will increase to £175,000 per person and continue to increase in line with Consumer Price Index (CPI), therefore families could escape IHT on up to £1,000,000 of their wealth. What’s not to like about that!
Furthermore, as for the current Nil rate band, your husband, wife or civil partner can inherit any unused RNRB on your death.
So, for example if an individual were to die after April 2020 and left everything to their partner, they would be entitled to leave up to £1,000,000 including their main residence, tax free! Providing of course it is left to a direct descendant.
This scenario could cause a potential flaw however. If an individual were to remarry this would automatically revoke the Will made previously. Typically, their new Will would leave everything to their new partner and this is where the pitfall arises. When writing up a new Will it would be wise to consider your own children or grandchildren otherwise you could see your whole estate being benefited by someone else’s direct descendants.
So, let’s have a brief look at trusts and how it can affect the additional Nil rate banding. Placing assets in to trust can often be regarded as useful vehicle when it comes to tax efficiency. But what if the family home was to be passed in to a trust? It should be noted if placed in to a Discretionary Will Trust for the benefit of children and grandchildren, the RNRB may be lost. However, the allowance won’t be lost if the Trust gives a child or grandchild an absolute interest or interest in possession in the home. Alternative Trusts such as Bereaved Minor Trusts, 18-25 Trusts and disabled person’s Trusts will also retain the RNRB when benefited to direct descendants.
It is clear RNRB isn’t as clear cut as it seems from the outside. By April 2020/21 High net worth individuals over £2M should be aware of the tapering rule for example. The additional Nil rate banding will be reduced by £1 for every £2 that the value of the estate exceeds the threshold (£2M by April 2020/21).
It would be naïve to only take positives from the implementation of the RNRB, and there are several pitfalls and traps to consider when planning for Inheritance Tax (IHT). However, none of which, can’t be planned for or even avoided for that matter. It may look good from the outside, and there is no reason why it can’t look just as good from the inside with careful and succinct planning in place.
Raffaele Castaldo DipFA
6 December 2016