The Inheritance Tax Nil Rate Band has been raised to £1,000,000?
True or False?
Most definitely false. I've been asked this quite a lot in the last year and I know where the confusion has come from. It has come from the announcement of the new Residence Nil Rate Band (RNRB) which started on 6 April 2017. The trouble is in the summer budget of 2015 a proposal of a new residence nil rate band was announced which didn't start until 6th April 2017 and will be phased in over the next four years to reach the full benefit. Many people think it started immediately.
Inheritance Tax ( IHT ) was once only seen as a tax for the wealthy. Substantial rising property prices however together with a static Nil Rate Band has meant that IHT has inadvertently affected many families who are property owners within Greater London.
The existing Nil Rate Band works as follows:
If your estate (this includes but is not limited to your family home, property, investments/money and personal property) exceeds the Nil Rate Band on death IHT will normally be charged at a rate of 40% after the deduction of any liabilities, reliefs and exemptions that may apply. The current figure of the Nil Rate Band is £325,000 and this will be frozen until 2020/21. Since the family home often makes up a large percentage of an estate the Residence Nil Rate Band was introduced to offer some relief here.
The RNRB will be phased-in from 6th April 2017 over four years. It will take until tax year 2020/21 when the RNRB will have reached £175,000. This figure along with the existing Nil Rate Band of £325,000 means an individual will in the future be able to leave up to £500,000 if they meet the criteria of the new RNRB.
The Residence Nil Rate Band along with the existing Nil Rate Band can also be transferred to a spouse or civil partner. There is no IHT on the first death of a spouse or civil partner due to the spouse exemption. IHT only occurs on the second death if all assets were left to the survivor on the first death. The survivor will have two Nil Rate Bands of £325,000 each and by 2020/21 two Residence Nil Rate Band's of £175,000 each. Hey Presto this is where the £1,000,000 figure has come from. For some reason many people are of the view that the Nil Rate Bands have been increased now but as you can see this is not the case.
A further word of warning. The Residence Nil Rate Band is not automatic. There are criteria that must be met. Firstly it can only be used if you are a homeowner. The additional RNRB will be of no use to you if you do not own a property which is your main residence.
Secondly the main residence must be left on death to a lineal descendant. This includes biological children, step children, adopted and foster children or a lineal descendant for example grandchildren. You cannot benefit from the RNRB if you do not have lineal descendants.
Finally if an estate reaches a net value of £2 million the RNRB is withdrawn at a rate of £1 for every £2 over this threshold. By the tax year 2020/21 with an estate in excess of £2,350,000 you will not benefit from the RNRB. So as it stands today a couple (or an individual who will transfer a deceased spouse NRB) can benefit up to £850,000 as long as the conditions are met.
If you are concerned about the effect that IHT will have on your estate and the amount of money that will be left to your family and friends I will be pleased to help. Please just get in touch.
George Ttouli APFS Chartered Financial Planner
020 8882 6688
The Corner Shop
6 Highfield Road
True or False?