Inheritance tax relief on bricks and mortar
Whilst house prices may not be soaring, the new Residence Nil-Rate Band (RNRB) is still a welcome tax relief against rising inheritance tax (IHT) bills.
The RNRB tax relief is being phased in from April 2017 and applies to only one residential property. Unless business premises, second homes and buy to let properties have been used as a residence, they are excluded. Foreign property qualifies provided it has been used by the deceased as a residence during their lifetime.
Currently, estates of surviving spouses could benefit from £250,000 of RNRB relief in addition to the £650,000 Nil Rate Band (NRB) allowance (the maximum transferable allowance). By 2020/21 this combined total of RNRB and NRB will reach £1 million.
To qualify for the RNRB strict conditions must be complied with. The home must be both a ‘qualifying residential interest’ (QRI) and ‘closely inherited’. A QRI is an interest in a residential property that must have been occupied by the deceased at some time during their ownership. This means a property, once occupied but subsequently vacated or let to tenants, can qualify. To be ‘closely inherited’ it must be left to children (including step, adopted and foster children), grandchildren and spouses, widows or widowers of any of the above. Where a property is left to a mix of direct descendants and other relatives or friends, the tax relief will be apportioned.
One problem of the RNRB is the relief is quickly tapered away if the estate exceeds £2 million. The value of the estate is calculated before any tax reliefs are deducted.
Any unused RNRB can be claimed by a surviving spouse. Thus, anyone who does not use some or all of their RNRB can pass it on. If the first spouse died before 6th April 2017, when the new tax relief was introduced, the surviving spouse can still carry forward the RNRB to set against the value of their property when they die.
There are special provisions which mean the relief applies where a person sells their home or downsizes to a less valuable property. However, these rules are very complicated.
For the RNRB to apply, the value of the family home must be part of the estate and not given away in the seven years prior to death. It is important not to gift the family home if RNRB is to be used.
Wills leaving assets into a discretionary trust will not qualify for RNRB, but Trustees may be able to amend the terms to remedy this.
To take advantage of RNRB relief, Wills should be reviewed and refreshed where the estate is liable for IHT. If there’s any type of trust, including, for example, gifts to grandchildren at 21, changes could be required. If an estate exceeds £2 million, lifetime and even deathbed gifts can also mean the relief applies.
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