In the Summer Budget 2015, the Government announced the rollout of a new Nil Rate Band (NRB) for Inheritance Tax (IHT) specifically to use against an individual’s main residence. This was intended to allow parents to pass on the family home to their children, thus helping to meet a flagship pre-election promise. The new ‘main residence NRB’, when added to the existing NRB and combined for a married couple or civil partnership, gives a headline grabbing £1 million threshold before IHT becomes payable.
Now that further details have been released, it’s clear that many individuals will still be affected by IHT. The changes within the Finance (No.2) Act 2015 not only complicate the situation for estate planning, they also potentially make it harder for financial advisers to discuss the topic with clients, as the £1 million figure gives a false sense of security.
Debunking the myth?
The new act received Royal Assent on 18 November 2015 and includes nine pages of legislation on the redefined Residence Nil Rate Band (RNRB) – no longer only main residence but a dwelling-house which has at any time been the deceased’s residence and which forms part of the deceased’s estate. The RNRB applies if a ‘qualifying residential interest’ is ‘closely inherited’ by lineal descendants.
The RNRB is transferable to the last survivor and can be claimed on second death depending on how much RNRB was used on first death.
Where the value of the deceased’s estate (after deducting liabilities but before reliefs and exemptions) exceeds £2 million then the RNRB will be reduced by £1 for every £2 above the threshold. The impact of this taper threshold will inevitably lead to a number of planning considerations.
What do these changes mean for advisers?
- Greater confusion for clients
- Client assumptions that IHT is no longer a problem
- Further clarification required on downsizing
- Greater need for planning to ensure IHT is not an unexpected consequence
Planning with the RNRB is key
- Is there sufficient net value in property to use full RNRB?
- Will the property be left so that it is ‘closely inherited’?
- Has loss of RNRB due to Taper Threshold been considered?
- How will asset value growth impact on future potential IHT liabilities?
A worked example
- Married couple, mid-seventies, in good health
- Main residence £500,000
- Investment portfolio £375,000
- Cash £50,000
- Current IHT liability for 2015/16 on £925,000 of assets is £110,000
- Client’s expectation is there will be no IHT liability post 2020/21
Assuming the couple’s main residence value grows by 7.5% annually, investment portfolio value grows by 6.5% annually and a cash return of 1% annually, their IHT liability in 2021/22 is actually £148,762, even with two RNRBs.
Utilising Business Property Relief (BPR) to mitigate a client’s IHT liability
The clients could decide to make an investment into BPR qualifying assets, which will be 100% free from IHT after two years. This would also allow them to maintain control over their assets. This can be a compelling opportunity when compared to more traditional solutions such as gifting, which can take up to seven years to become IHT effective.
Further education on the Residence Nil Rate Band
After hearing positive feedback from advisers on their appetite to receive further education on the Residence Nil Rate Band, our business development team have been on the road delivering comprehensive insight to both individuals and teams to help them fully understand this topic.
If you would like to book a meeting with a member of our nationwide business development team please call us on 020 7391 4747 or email firstname.lastname@example.org.