From 5 April 2017 the residence nil rate band (RNRB) comes into force increasing the tax-free allowance on death. It allows married couples to leave assets with a value of up to £1 million free of inheritance tax.
Does it apply to me?
It applies to individuals who own a house which is inherited by children or grandchildren. Stepchildren, adopted children and foster children are also included.
If the property value is less than the RNRB available any unused RNRB cannot be transferred against the rest of the estate. For estates worth more than £2million tapering relief will apply.
If the home passes to a surviving spouse on death then any unused RNRB can be transferred to the surviving spouse even if the deceased spouse died before 6 April 2017. If the deceased owned more than one property then their trustees can nominate which property the RNRB will apply to, as long as the deceased lived there at some point.
What if my home is sold to pay for care home fees or I downsize?
If a person disposes of their property or downsizes after 8 July 2015 then the RNRB can still be claimed against the sale proceeds of the previous property.
When does it not apply?
The beneficiaries of the property have to be entitled to the property on the death of the deceased. If a beneficiary is only entitled to the property once they fulfil a certain condition then the relief will not apply. For example, if grandparents leave their home to their grandchildren on the condition that they reach the age of twenty-five the RNRB cannot be used.
Trusts can affect the application of the RNRB. If your property is placed into a discretionary trust in your Will then the RNRB cannot be claimed unless the trustees make an appointment out of the trust in accordance with the required formalities. If the property is placed into a trust during the lifetime of the deceased then the RNRB may be lost.
Should I change my Will?
It is recommended to keep your Will under regular review to reflect changing circumstances. The change in legislation may not have any impact on your Will but we would recommend that you check to ensure you are securing the maximum RNRB available, especially if you are widowed, have children from a previous marriage or trusts are created in your existing Will.
Married couples with an estate worth more than £2 million and all unmarried couples should consider redirecting assets on the first death to secure the maximum RNRB.
You may also want to include a specific provision in your Will to ensure that the maximum RNRB is applied. A deed of variation can be used within two years of the date of death to vary what happens to the property but is not always practical where there is a wide class of beneficiaries involved as consent of all beneficiaries is required.
This is a complex area and you may consider it sensible to review your Will in light of these changes.
If you would like any advice regarding your wills or on how the RNRB applies on death, please contact Emma Garfitt on 0113 284 5101 or firstname.lastname@example.org