Are you up to speed with Inheritance Tax changes?
On 6th April 2017, a new form of Inheritance Tax, the Residence Nil Rate Band (RNRB) was introduced. RNRB could increase the amount of wealth you will be able to pass on to your family. However, the new tax features certain restrictions and will not be available to everyone. Below is our guide to everything you need to know about RNRB.
Existing Inheritance Tax allowance and Residence Nil Rate Band
Under the existing law, Inheritance Tax is charged on any estate which is valued at £325,000 plus. If you are married or in a civil partnership, the rate is transferable between couples, which means you will be able to pass on an estate value up to £650,000 before Inheritance Tax is payable. Once the tax-free threshold has been reached, the remainder would be taxed at 40%. However, now that the additional RNRB has been introduced, if you own a home and the property is included in your estate, and it is left to direct descendants, you could further reduce the amount of inheritance tax payable upon your death.
“Direct descendants” include anyone who is legally a direct descendant; obviously, this includes children and grandchildren, but the law also provides the same provision for step-children, fostered and adopted children. However, you cannot pass on your property to siblings, nieces or nephews as these are not direct descendants. As well as having to own your own home and have direct descendants, there are limits on the size of the estate. If the size of your estate is more than £2m, you will be ineligible for RNRB.
RNRB allowance increases
The government will be gradually increasing the amount of RNRB available during the next few years. When introduced, the RNRB stood at £100,000. This amount will rise in increments of £25,000 each April until 2020 when the allowance will stand at £175,000 per individual. If you are married or in a civil partnership, you can combine your RNRB allowance, which means that by 2020, you and your partner could avoid paying inheritance tax on up to £1m of your estate. After 2020, the RNRB allowance will increase in line with the Consumer Prices Index (CPI).
Reviewing your Will
In light of these developments, it is essential that you take the time to review your will. By considering the size of your estate, the named beneficiaries, and the wording of your will, you can establish if you will be eligible for RNRB, and if not, action may be able to be taken to ensure that the RNRD is secured .
If you would like further advice or information about how the RNRB could affect your estate, contact us today.