On 6 April 2017, the new residence nil rate band allowance (RNRB) will come into effect. Are you ready and have you reviewed your Will in light of this?
Here we’ll explain whether you could be affected by the new rules and what you need to do.
What is Inheritance Tax?
Inheritance tax on death is a tax charged on the value of a deceased person’s assets and the value of any gifts which they have made in the 7 years before they died (their estate). Currently if the value of the estate exceeds the threshold of £325,000, then inheritance tax is charged at a rate of 40% on everything in excess of this threshold. No inheritance tax is paid if the estate passes in its entirety to a spouse/civil partner or registered charities and there are also valuable reliefs available to those owning businesses and farms.
What are the changes?
From 6th April 2017 the RNRB is available where a deceased person owns a home (or a share of one) which is included in their estate. The RNRB is added to the standard nil rate band to increase the overall tax free allowance and thereby reduce the inheritance tax which otherwise would be payable. The RNRB allowance will start at £100,000 for the 2017/18 tax year and will rise by £25,000 each year to £175,000 until 2020/21. Thereafter it will rise in line with the Consumer Prices index.
Current rules on the transfer of nil rate bands between spouses will continue, so unused RNRB will also be available to transfer to a spouse, for example where the first spouse has passed everything to their surviving spouse on their death. Therefore, if one spouse/civil partner dies leaving everything to their spouse/civil partner who then passes away in August 2020, the total nil rate band available on the second party’s death would amount to £1 million.
Who will be affected?
First of all, if your estate is less than £325,000, this change will not affect you. Furthermore if your estate exceeds £2 million then further rules apply to reduce the relief available.
Put simply, the inheritance tax change will mainly affect those who are married with children or other direct descendants, own their home and have assets above the nil rate band allowance which, at present, is £325,000.
What to do now
The first thing you need to do is review the value of your current estate. The rules on the RNRB are not straightforward and we would recommend that you review your will and your circumstances generally to ensure that you are maximising the available reliefs.
We have a dedicated team here at Farleys who can provide advice and guidance on the new rules in order to ensure that you won’t leave any unforeseen inheritance tax surprises for your loved ones. Speak to one of our experienced solicitors today on 0845 287 0939 or submit your enquiry online.