New inheritance tax allowance for homes: six things you didn’t know
The new Residential Nil Rate Band (RNRB) which was introduced in April 2017 means that over the next 3 years, couples with a home worth up to £1million will be able to pass it on to their direct descendants IHT free. However, a recent survey found that 70% of people had no idea about the new inheritance tax allowance for homes.
At the moment, the first £325,000 of a person’s estate is free of IHT which is known as the nil rate band (NRB), the introduction of the RNRB means you get an extra chunk free of IHT if you own a home. For estates worth over £2million, the new RNRB will be progressively tapered away by £1 for every £2 that the total estate exceeds the taper threshold.
There have been lots of misunderstandings about the new RNRB which could lead people to structure their finances in the wrong way, which is where an experienced financial adviser would be recommended.
The five areas with the highest misunderstanding are:
- You can select which property the allowance is set against
The new RNRB can be used against any property within or outside of the UK which was used as your own home and lived in by you. However, the value of the property must be included within the person’s estate for IHT reasons.
- The allowance can still apply even if the property has already been sold
This means that if you have downsized you will not be penalised because the allowance can then be used within your estate against the value which the property was sold for.
- Any outstanding mortgage is deducted before the allowance is added
The value of the home is calculated by subtracting the liabilities secured on the home from the market value of the property, all for RNRB reasons.
- The allowance can only be used when the property is left to direct descendants
The home/value of the home must be inherited by your child or grandchild for the RNRB to be eligible; this does not include siblings, any other members of the family, other people or trusts.
- This allowance will rise by £25,000 every year for the next 4 years
The current RNRB is at £100,000 and by 2020/2021 the RNRB will have reached £175,000 per person.
- The allowance of a previously deceased spouse is available on the second death of the surviving spouse irrelevant of when the first spouse died
This is only available provided all of the previous five points are adhered to.
Given these confusions and misunderstandings of the new inheritance tax allowance for homes , it is more important than ever to seek expert financial advice. Do not hesitate to call us, we would be more than happy to help you reduce your IHT bill as much as possible by taking advantage of the new RNRB correctly.
Who should you leave your home to on death?
LV Legal Services says that over 1.7 million people who are 55 plus have the potential to miss out on the newly increased nil-rate band as they have left the family home to a sibling rather than a direct descendant. One in 10 over 55s have decided to leave their estate to a sibling, meaning the new residential nil-rate band will not apply and will disqualify them from being able to use it.
The new residential nil-rate band came into effect on the 6th April 2017 and it means that an initial allowance of £100,000 per person per family home will be inheritance tax free, increasing the total maximum individual allowance for IHT to £425,000 or £850,000 for married couples. Anything above £850,000 or £425,000 will be taxable at 40%.
The allowance for tax free inheritance on the family home will then increase by £25,000 per person per tax year until 2020, when the tax free allowance combined with a spouse or a civil partner is at £1million. Meaning you could leave your property to either your children or direct descendants of a value of up to £1million IHT free.
However, if you were to leave the family home to a sibling then the IHT bill will be 40% of the difference between £1million and £650,000, leaving a potential IHT bill of up to £140,000.
This means getting the correct advice on reducing the risk of IHT is worthwhile and could save your children or direct descendants up to £140,000. Do not hesitate to contact us, we’d be happy to help.
When is a gift not a gift?
A gift of property made by a person on or after the 18th March 1986 is called a gift of reservation (GWR) as long as the person is still benefitting from the property, ie they are still living in it. If this benefit is reserved, then it will be included as a part of the gift givers estate for inheritance tax purposes, even if they no longer own the property, they are still using it for their own benefit.
When talking about a GWR, a gift can mean a sale which was made deliberately below the market value of the property. For example, if a property was worth £1million and a person sells it for £750,000. The transfer is part sale and part gift meaning the £250,000 loss to the estate would be treated as a potentially exempt transfer and would be included in the deceased’s estate if they pass within 7 years of the sale, even if they didn’t receive any benefit from the transfer.
The GWR rules have only been around for 30 years meaning if someone placed an investment in a trust before the 18th March 1986, they will not get caught unless further gifts are made on or after that date.
The use of these GWR rules by HMRC means it is very important to ensure that any gifts or loans made to adult children or anyone else are properly recorded as failure to do so could have them fail for IHT purposes.
As always, experienced advice is essential, please call us for help.