From April 2017 there are further improvements for individuals in the context of Inheritance Tax (‘IHT’) planning. IHT is a tax charged on an individual’s death at a rate of 40% based on the value of your estate. The nil rate band (‘NRB’) (£325,000 2019/20) is the amount to which IHT is charged at a rate of 0%.
Further to the Finance Act 2008, where a spouse/civil partner dies having previously benefited from a deceased spouse/civil partner’s estate, the survivor can claim a proportion and in some cases all, of the first spouse’s unused NRB. Thus, in the correct circumstances where one spouse/civil partner dies leaving their entire estate to their surviving spouse/civil partner, the survivor may benefit from a NRB of £650,000 in 2019/20.
In the case of all deaths post 1st April 2017, matters have for many, improved again in an IHT context, following the introduction of the residence nil rate band (‘RNRB’). Your estate will benefit from the RNRB, as well as the main NRB, if you leave a property, in which you have resided during the course of your lifetime, to your ‘direct descendants’. The RNRB can potentially assist those inheriting your estate, by increasing the percentage which is charged at 0%. When initially introduced, the RNRB was set at £100,000, to increase by £25,000 in the following four tax years. The RNRB therefore currently stands at £150,000, due to increase to £175,000 in the tax year 2020/21.
The RNRB can be claimed if you die after 1st April 2017, where you leave an estate worth less than the upper limit (currently £2m) and if you leave your home to your ‘direct descendants’. In estates which exceed £2m in value, the RNRB is tapered down. Direct descendants, for the purposes of the RNRB, are children and grandchildren, as well as some other individuals such as stepchildren and foster children. In addition, much like the provision under the Finance Act 2008, even if on the first death you leave your home to your spouse/civil partner, the RNRB is not necessarily wasted, as it can be carried forward to the second spouse/civil partner’s estate. Furthermore, the sale of your home will not necessarily mean that the RNRB is missed.
There are some not immediately obvious pitfalls and therefore, as always, careful planning and Will drafting is key so as to ensure that this important exemption is not missed.