3 May 2018
Author: Stephen Breen
A report by insurer NFU Mutual suggests that thousands are missing out on a valuable inheritance tax break introduced last April. The Residence Nil Rate Band (RNRB) was introduced last April, giving homeowners an additional £100,000 allowance to pass on to ‘direct descendants’ where the estate includes a family home. The same allowance has just increased to £125,000 for the 2018/19 tax year and will increase again for 2019/20 to £150,000. By the 2020/21 tax year, the RNRB will be worth £175,000 and from 2021/2022, it will then increase in line with Consumer Prices Index (CPI).
The RNRB allowance may only be used when leaving the family home to a ‘direct descendant’. Generally speaking this includes children (natural, adopted, foster and stepchildren) and grandchildren but not nephews, nieces, siblings and other relations (see the full Government guidance here).
When added to the current tax-free threshold of £325,000, the RNRB allows individuals to leave a substantial amount to their heirs without having to pay inheritance tax. Since gifts between husband and wife do not attract inheritance tax and the percentage of unused inheritance tax allowance can be transferred to the survivor, a couple will effectively be able to leave £1 million to their children by 2020/21, provided the estate includes the family home. If the estate exceeds the applicable allowances, the excess is usually taxed at 40%. However, it is possible to reduce this liability by giving away some of your assets before you die and taking advantage of various ‘Exempted Gift’ allowances.
- Up to £3,000 of gifts each tax year (and this allowance can be carried forward to the following year if it goes unused, for one year only)
- Wedding or civil ceremony gifts of up to £1,000 per person (£5,000 for a child or £2,500 for a grandchild or great-grandchild) each tax year
- As many normal gifts out of your income as you like, provided that you can maintain your standard of living after making the gift
- Payments made to help someone else with their living costs, such as a child under 18 or an elderly relative or
- Gifts to charities and political parties
- Small gifts up to £250 per person provided that you have not used another exemption on that person
Gifts that fall into the above exemptions do not form part of your estate. However, it is very important to keep proper records to ensure that your executors have evidence that inheritance tax is not due on the amounts paid out.
The taxman took a record £5.2bn in inheritance tax in 2017/18 with just 3,065 estates claiming the additional allowance between April and December of last year. NFU Mutual estimates that just 4,000 of the 24,000 estates that paid inheritance tax in the last tax year will have taken advantage of the allowance. By using a solicitor to prepare your Will and advise you on potential inheritance tax liability, you can ensure that your estate will be able to take advantage of valuable inheritance tax perks and minimise the amount of tax that ends up in the taxman’s pocket. Speak to our Later Life Planning team for more information.